Indian professionals, bloggers and website owners are joining a list of their global peers in earning income through sale of advertisements via Google AdSense program. But being a new income head, there has been confusion over the tax treatment of such earnings.

Foremost thing of AdSense receipts for Indian residents is that the income is taxable in India. It can be shown either under the head ‘Income from Business or Profession’ or under ‘Income from other sources’. The deciding factor in this case shall be the nature of work of AdSense publisher. If he is maintaining the blog/ website on regular basis then it can be shown under his professional income while if it is just a part time job and receipts are low, the income can be shown under latter head.

The advantage with showing earnings under Income from profession is that one can claim all expenses related to earning the income as deductions. So, expenses like Telephone/ Broadband expenses, advertisement expenses, books and magazine subscriptions, staff salary expenses, online services, web design, traveling expenses among others would be deducted from professional receipts reducing the tax liability. Apart from this, one can also claim depreciation expenses on purchase of car, computer and other capital items.

Regarding the ledger head, under which AdSense receipts are classified the best option is ‘Professional Receipts - Income from Website’. There is no need to mention the term Google AdSense in Balance Sheet or Profit & Loss A/c but instead details can be mentioned in each narration entry. Also, keep a stock of all counterfoils of cheques from Google and bank account statements, so that they can used in case of scrutiny by Income Tax authorities.

If you have misplaced the counterfoils that came with AdSense checks, print the statement of earnings from AdSense dashboard.

Another issue that emerges from Google AdSense income is whether the receipts should be shown on accrual basis or cash basis, since earnings for month is normally credited after 2 months. For example, AdSense publisher ‘X’ earns $100 in month of March, then the cheque is made by Google around end of April by converting the $ amount into Indian Rupees at the prevailing exchange rate, which is then sent to the publisher’s Indian address. So normally the cheque would be credited into publisher’s account in May.

For such cases, one can choose either of these two basis, but while choosing cash basis, he has to make sure that only those expenses should be claimed which have been incurred in earning income for that particular month in which expenses are claimed, other wise those expenses shall be disallowed by Income Tax authorities.

Google currently does not have a system of direct credit into Indian bank account unlike Paypal.

Why AdSense publishers are not liable to pay Service Tax?

There are lot of doubts over whether Income from Google AdSense would constitute payment of Service Tax @12.36% since online sale of space for advertisement is taxable under Service Tax.

But the issue is simpler than it seems. The liability of payment of service tax lies with Google and not the blog/site owners. This is because it is Google which sells the advertising space to advertisers through Google AdWords at a rate which is known only to it and publishers only get commission from Google.

See: Should Indians Pay Service Tax on Online Advertisements

As per a ruling, Google is already liable to pay service tax on AdWords at 12.36% and if AdSense publishers also pay 12.36% on AdSense, then this means a quarter of Advertisement revenue would to to the tax officials, spelling a virtual killer for online advertising business in India.