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Why Eric Schmidt Should Meet P Chidambaram

“Internet governance is an oxymoron,” India’s IT Minister Kapil Sibal said at Google’s Big Tent event being held in the capital on Thursday. After a lot of back and forth, better sense has prevailed. Sibal seems to have understood the Internet’s funda crisp and clear. But for Google’s Executive Chairman Eric Schmidt the battle is only half won.

While he is at it, there is a man Schmidt might want to meet at the North Block. At stake, is millions and perhaps billions of dollars of tax money on Google’s future revenues in India.

For Google, whose line of defence against paying higher taxes demanded by the Income Tax department, is that it arises from a “difference of interpretation of the law,” Finance Minister P Chidambaram is the man to meet.

According to the Income Tax department, which is struggling to mop up tax money for the Finance Ministry, Google owes the exchequer over $14.5 mn in taxes and penalties for the assessment year 2008-09. For the search giant which reported $14.42 bn in revenues and $3.57bn in profits for the fourth quarter of 2012 worldwide, double digit millions is pocket change.

But then, why should Google be worried? It gets a bit tricky here. But bear with us.

Eric Schmidt
Eric Schmidt with Som Mittal

Google is contesting the Income Tax department’s $14.5 mn penalty order at the Advanced Authority of Rulings, a quasi judicial  body which ascertains tax liability of non residents. We aren’t sure of the outcome of the latest hearing which was to be held earlier this month*. However, documents reviewed by NextBigWhat show that the department is fighting hard.

In a 19  page penalty order issued in March 2012, the Income Tax department accuses Google of deliberately employing “tax evasive practices,” on multiple occasions. This could assume massive proportions if parliamentarians in India decide to take cues from their European counterparts.

Top executives of American companies such as Google and Amazon are being grilled in the UK for similar practices that are mentioned in the Income Tax department’s report. (Read more about how they save taxes here.) This is where it gets serious.

For the assessment year in question, Google was just getting started on big revenues from India and the tax liabilities including penalties, aren’t of much account. However, the taxman is onto something bigger here.

“Google’s adwords revenues has been growing in a geometric proportion to over Rs 500 cr for AY 09-10 and to over Rs 1,000 cr for AY 10-11,” the department noted in its assessment order of 2011.

Like Vivek Wadhwa told Bloomberg TV this morning, “Google has a wide open playing field in India…Its a massive massive market opportunity for Google.”

Taxes on new revenues, will obviously be a matter of concern in the future, if not now.

In the recent budget announcement, Chidambaram also proposed to raise taxes on payments made to non residents by the way of fees and royalties for technical services from 10%  to 25%. Google India can opt for beneficial tax provisions under the India- Ireland tax treaties for the large amount of its revenues which goes out to Google Ireland Limited in the way of “royalties.” So the rate increase may not be a cause of worry for Google. However, the so called “difference of interpretation of the law,” and the precedents the current litigation will set, is something only Mr Chidambaram or a long litigious battle can set straight.

* A Google spokesperson did not respond to queries specific to the tax case in question.

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