With the digital revolution coming in the last decade startups and brands have created their digital presence in terms of websites and mobile applications.
With the emergence of mobile applications, players like Google and Apple came into play with their mobile stores. Two major operating systems which exist for mobile phones are controlled by Google and Apple.
How does it work?
When you start as a startup or even you just want to put an application out of any of these stores, you have to register on these stores by Google and Apple.
You must list your app in app stores if you want it to be available for download by a global audience. On paid apps and in-app purchases, most app shops now levy a fee. They take a part of the app earnings as a standard middleman in exchange for helping your app distribution. This is how app retailers get money.
What apps are available in Apple and Google’s respective app stores is decided and controlled by them. They can do so by regulating the terms and conditions for their app shops, determining what functions app providers can use, and deciding how apps are rated and featured in the app stores. Because they control the mobile operating system, Apple and Google have the potential to impact the availability and functionality of apps in this way. App stores are thus the entities in charge of app selection and presentation to users.
How does taxation works?
App distribution through the Apple App Store enables customers in 175 countries and regions access to over a billion apps for iPhone, iPad, Mac, Apple TV, and Apple Watch. There are no hosting costs, but the Apple Developer Program costs $99 per year ($299 for the enterprise version). Apple will also take a cut of your app’s income.
So, what percentage of your app revenue does Apple take?
- It was a 30% commission from the total price of all purchased apps and in-app purchases from the App Store until November 2020. Since then, two rates have been in effect:
- If your annual net app income exceeds $1 million, you’ll get a 30% cut.
- If you produce less than $1 million in annual net app revenue, or if you’re new to the App Store, you’ll get a 15% share.
- With a subscription-based app, you’re looking for 12 months of service in the App Store.
Google also takes a 30% portion of your app sales, and after a year, Google’s cut of subscription revenue drops to 15%. A $25 one-time registration charge is also required for the developer account.
Google, like Apple, ensures that you are legally obligated to pay a portion of your app revenue.
Problems around the taxation of App Stores
When it comes to the Indian startup system, the two major problems which lies are-
- Google and Apple forcing app developers to use their payment gateway only.
- Both the app stores are charging a 30 percent commission along with the existing taxes.
- All this amount is only for listing the app on the platform.
The whole controversy started when Google decided to be stern on the fact the all the developers need to use their own payment system. Here’s an excerpt from Google’s policy:
Developers must use Google Play’s payment mechanism when charging for apps and downloads. Unless the payment is entirely for physical objects or digital content, developers must utilize Google Play In-app Billing as the payment method for in-app purchases.
When Google last year announced that developers will have to pay a 30% commission from September 2021, cry for establishing an all-Indian app store to lessen reliance on global software behemoths, which have been under growing fire for alleged unfair practices aimed at grabbing market dominance.
Along with the 30% commission the Indian app developers need to pay the taxes of the country too.
Another bigger problem is that all this huge amount is only for listing for apps. The stores don’t do anything apart from that. The developers or the startup owners have to do marketing, promotion and everything else on their own.
What Experts Say?
We decided to ask a few of the experts and players in this ecosystem about their views.
Vinay Singhal Co-Founder and CEO of OTT Platform STAGE said, “ This taxation system has a very bad impact on the Indian startup ecosystem. Google and all these big tech players are abusing their power in-app distribution market. They have their duopoly on this market and they are using it in a bad way. Apart from that, they say you can only use our payment gateway which clearly violates a lot of India’s competition law. “
“This whole problem is multi-layered. The statement reads that this policy is applied to digital goods. But the definition of Digital goods is ambiguous. For example, Swiggy and Zomato can use their payment gateways but Our platform STAGE can’t use it. How are we different if we are providing digital services? In layman terms, I’ll say this is an unfair LAGAAN and Google & Apple are East India Company.”
“The impact is unmeasurable. If we take a certain amount of fees from our audience, we pay 30% to these stores, 18% to the government and we are left with 52% which accounts for promotion, distribution, marketing and content production which is coming down heavy us.”
Focusing on another problem that exists in the service, Vinay says, “For that 30% percent commission what we are getting just a listing on the platform and nothing else. They are basically giving us nothing. We have to again pay the marketing and promotion charges”
Another problem that occurs here is the quality of the payment gateway. Vinay concludes by saying that Google and Apple are acting as big bullies of the market and trying the disrupt the Indian startup ecosystem.
Vinay and his insights make one thing clear and that is the dissatisfaction among the Indian startup ecosystem.
We talked to another startup founder Snehil Khanor, CEO and Co-Founder of TrulyMadly.com. When asked about what will be the impact of this decision he says, “ This is very unhealthy for the ecosystem as there is no logical reason for such high pricing and on the top of that asking us to remove all other gateways and use theirs. If we are given the freedom to choose, I don’t think anyone will choose Google Play.
He said further, “They charge 30% which is illogical. Their payments are delayed which impacts the cash flow of startups while on the other hand Indian alternatives like Paytm transfer the money under 48 hours”
On being asked what will be the impact of this on upcoming startups, Snehil said, “ It’s a super bad start for them as they will be forced to use just Google & Apple’s payment system and pay 30% of their revenues as commission/tax for no benefits. On top of that, they will receive all their revenues once a month so they will have a lot of issues managing their cashflows as well. If they had been allowed to use other homegrown payment options like PayTM, PayU etc they would have charged just 2% MDR.”
Final Conclusion- Bottomline
Taxation by Mobile App stores is unhealthy for the Indian Startup ecosystem. Ambiguous definition of digital goods, unnecessarily high prices, obligatory use of only one payment gateway, all these factors point at one thing and that is power abuse. Google and Apple being the dominant figures in the app distribution sector are clearly bulldozing over Indian app developers and startups which depend on their mobile apps as a revenue channel.
The ridiculous amount of money leaves these app owners with no choice but to spend less on their marketing and promotion which further downsizes the revenue.
With local players such as Paytm coming into the foray, probably another big change might lie on the horizon for the Indian startup ecosystem which we will get to know with time.