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Be afraid, be very afraid, if you are an American technology company earning big bucks offshore. From this month, India is imposing a tax on the fees paid by advertisers to offshore Internet companies, such as Google and Facebook. While the U.S. Congress blusters about tax avoidance and the U.K. Treasury wags its finger at Facebook, the Indian government is playing hard ball, hitting companies that it believes are shifting profits offshore.

The new tax, known as an equalization levy, will amount to 6 per cent of the gross charge for advertising on the Internet where the platform is operated by a non-resident company and the sum exceeds 100,000 rupees ($1,950). Instead of pursuing the offshore operators, the law imposes the obligation on the Indian client who must withhold the amount of tax from the fee paid to the foreign e-commerce company and pay the tax directly to the Indian government. Failure to do so risks pushing up the Indian firm's own tax liability.

Like most governments, India struggles to capture the taxable income of cross-border Internet commerce businesses. The baffling complexity of their corporate structures means that governments find it almost impossible to pin down where profits are made. A platform operator might be headquartered in America, have clients in the U.K. while booking transactions in Ireland, paying royalties to a Luxembourg shell company that then shifts its income to the Cayman Islands.

Such complex arrangements enable a company such as Google to keep its overall corporate tax rate to 17 per cent when most jurisdictions have rates in excess of 20 per cent and in the U.S. it is 35 per cent. In the U.K. last year, Google paid a tax rate of less than 3 per cent. Instead of messing about with anti-avoidance rules and expensive tax audits to reveal hidden profit, the Indian government has decided to take the harsh but simple approach and hit the firms' revenues. India's digital advertising industry is said to be worth $1-billion and is expected to expand by almost 50 per cent this year as retailers scramble to set up e-commerce businesses. Hence, there is great concern that the new tax might arrest the expansion. No one yet knows whether the tax will be absorbed by the likes of Google and Facebook or whether the offshore firms will simply jack up rates.

It's a gamble that New Delhi hopes it will win, not only by collecting some badly needed tax revenue but in giving an advantage to domestic competitors and, in the end, by forcing foreign operators to fully establish themselves as local players, thus further expanding India's e-commerce market.

Meanwhile, international efforts to agree to measures to curb aggressive tax avoidance by multinationals bumble along. The Organization for Economic Co-operation and Development's Base Erosion and Profit Shifting Project (BEPS) is the main driver of international co-operation but it is nowhere near the level of international co-operation necessary to prevent egregious behaviour. Indeed, the BEPS action plan acknowledges withholding taxes as an option available to tackle avoidance by e-commerce companies, although it does not recommend it.

It's easy to pick holes in India's gambit: The big e-commerce boys might decide to bully their Indian clients, raise ad rates, refuse to absorb the cost of the tax and generally retaliate. I may be proved wrong but I reckon that India is too important for the likes of Google to consider riding roughshod over a government representing more than a billion consumers. Rather than absorb the tax, I imagine that the Internet giants will end the nonsense of booking their advertising from a call centre in Ireland and they will decide to establish themselves properly in Bangalore.

The outside question is whether indirect taxation of e-commerce might be the way forward. Why not end the sophistry of defining profit, deciding when it occurs and where it occurs and what is really a "permanent establishment." Instead, why not just go after the cash flow at the point of sale? We can see the transactions, the payments and the revenue accruing to Facebook when it happens just as governments can see when you buy a litre of gasoline.

Imagine if the oil industry was able to sell gasoline seamlessly across borders. What if Petro-Canada operated its retail sites by long-distance telemetry and booked the consumer credit card purchases in a computer server in Ireland where it paid just 13-per-cent tax on its profits. It's a ludicrous idea, not least because we accept that the state can impose a levy on fuel at point of sale. E-commerce is ubiquitous and hugely profitable but we continue to allow companies such as Google to disappear for tax purposes like the proverbial Cheshire Cat, leaving only its grin hanging in the air.

India has said "no" and in this withholding tax, however clumsy, one government is finally taking a stand. It does not matter whether it is entirely effective; other governments will soon follow.

Carl Mortished is a Canadian financial journalist based in London.