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Digital Tax - Cohesive Model is need of hour!
By Aaliya Waziri
Jan 05, 2022

WITH the advent of digitisation, multiple companies now command a strong virtual presence across the globe which allows business/tech-enterprises to be significantly involved in the economic index of any given country without any traceable physical presence. As we live in the 21st century that is testament to significant changes in the technological sphere, perhaps the most remarkable innovations of our times is the internet. Jurisprudence has taught us that every legislation propounded must evolve with time - correspond to the dynamic needs of a society. In the context of commerce and taxation, laws must adapt to the changing transactional patterns of a society given that laws mirror societal needs and often shape them.

The primary question of paramount importance here is: why do need a law regularising digital tax? The simple reason attributes the neglect by existing tax assessment systems to tax transactions made by non-residents enterprises. The expanding domain of e-commerce presents an array of difficulties, for example, constitution of servers/sites as Permanent Establishment (hereinafter referred to as PE), valuation of computerised exchanges and so on. Considering the pace at which digital economy is developing, there has been a worldwide shift towards bringing the computerised economy, i.e. digital economy within the fold of traditional taxation regime. In order to tap revenue from the digital economy (owing to wide user base the Indian Parliament enacted an "Equalization Levy" through the Finance Act, 2016 which was later followed up by "Significant Economic Presence" (hereinafter referred to as SEP) test in Finance Act, 2018 (in congruence with OECD guidelines). However, it is crucial as this juncture to mention that implementation of SEP in 2021 allows a SEP in India of a non-resident to constitute a business connection in India by virtue of which income generated by a non-resident from such SEP will be taxable in India.

Essentially, an equalization levy is a tariff and is not based on ability to pay. Furthermore, it is only applicable to non-resident companies. Initially it was charged at only 6% and limited specifically to advertising services. Now, we may understand it is in terms of a direct tax which is withheld at the time of payment by the recipient of the services. The Indian government had increased its equalization levy to 6% on income of all digital business providers. This change extends the adjustment from online advertising services to all online trade/ e-commerce done in India by organizations that do not have "physical taxable presence" in India. It is at this juncture we must note that that an equalization levy does not operate in a vacuum. Any means of tax-evasion, storing of off-shore profits or re-arranging of profits is bound to trigger GAAR (General Anti-Avoidance Rules) mechanism.

The primary question to be asked at this point is - why was the SEP enacted and later deferred? Simplistically, present day innovations have made it workable for some organisations to do business in several countries without a PE. Expressions like "Border-less world" and "Present day innovation opposes Geography" have become reality for E-Commerce. Be that as it may, governments would like to gather annual assessment based on geography. They need an idea of a PE without fixed spot of business. An SEP would be a PE not requiring the fixed spot of business. Indian Government has declared its right to tax income when pay it is related with services devoured by an Indian Resident Consumer regardless of whether the services are rendered by the specialist company in India or not.

Section 9 (1) (v) (VI) & (vii) of the Income Tax Act read with explanation at the end of Section 9 make is evident that what is of significance is that the service should be utilized by an Indian resident, while the non-resident service provider may provide services within India or outside India. The place of that services are rendered is not of much relevance. When a SEP is treated as a Business Connection (hereinafter referred to as BC) and the non-resident is liable to be taxed burden in India under Section 9(1) (I) of the ITA. The whole rationale behind this is that the resident country does not tax the entire of its net benefit is available in India. Along these lines, the arrangement of SEP will be typical arrangement of tax collection from an outside evaluates branch/PE in India. It will not resemble Equalization Levy where a 'flat rate of tax' is exacted on net income.

The Indian Equalization levy is noteworthy on the grounds that it is a lot more extensive than the advanced administration charges set up in Europe. Yet it is another one-sided measure that goes against the endeavours of the OECD, as is evident from the OECD Interim Report 2018 on Tax Challenges Arising from Digitalisation. Now to come to the real issue we must understand why the SEP is deemed problematic by many. Once the notion of SEP is brought within the concept of Business Connection (under section 9 of the ITA) is when the apprehension of double taxation ensues. The Indian tax authorities would now have a reasonable nexus under ITA to tax a non-resident's business income in India therein establishing India's extra-territorial jurisdiction. This extra-territorial enhanced taxing power of India might overlap with the provisions of multiple Double Taxation Avoidance Agreement (DTAA)s that India has signed with several countries. Attention is drawn to the fact that an Equalization levy, in the manner that it operates when read in tandem with the SEP represents one of the more coordinated efforts to tap the digital commerce realm by an country and the same has been mentioned in the OECD Tax Challenges Arising from Digitalisation – Interim Report 2018.

These unilateral approaches to taxing giant MNC entities and their virtual presence create a host of convoluted problems without a linear answer. Upon analysing India's digital taxation model, one can reasonably conclude that the country is tracing the path laid down by countries like Singapore, Malaysia and France. It is natural that India may want to enlarge its taxing regime by bringing within its periphery e-commerce (in addition to the existing mandate of an Equalization levy on advertising entities) but none solves the universal problem of taxing a virtual presence. What it does, in fact, is create an unresolved impediment for tax payers (non-resident companies) and also for India itself. Having said that, it might be in India's best interest to wait for an ""why, how and when" OECD Action Plan that aims at harmonious rules for taxing e-commerce. Hence, I conclude by saying that instead of divergent digital taxing models, what we need to prevent double taxation is a single set of interwoven and methodical international tax rules, to sponsor global economic welfare. The need of the hour is a unilateral and cohesive model of digital taxation that ameliorates the confusion created by by the advent of untraceable technology.

(The author, a lawyer at Delhi High Court, is presently working as International Consultant (Women, Peace and Security) with UN Women Office for Timor Leste. She also serves as Consulting Editor for Grin Media Pvt. Ltd.)

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