Change is the only constant! Electronic commerce is not new for young generation and now has become a household thing. After demonetization, government has stressed a lot on doing pretty much everything online and introduction of BHIM app was a step forward taken by government to help citizens to do business electronically. The World Wide Web and mobile applications like amazon, flipkart, alibaba, etc. revamped the ways business has been carried out. Online advertisement has become a significant part of administrating expense. E-commerce has blurred the geographical boundaries and has complicated the taxation of transactions, as shifting of base from one country to another is easily possible in digital world.
Taxability of e-transaction depends on the characteristic of that transaction as per taxability provisions. There are many provisions which need examination in this sense like taxation of royalty, FTS, permanent establishment. The challenge faced by revenue authority is to identify where the actual transaction has taken place to tax the revenue earned i.e. the country where the goods are sold or the country where the server is located or the country where the owner is resident. For eg. A website owner could have the management in USA; it could have the server in UK and the buyer could be of India. In such cases it is very difficult to check on avoidance of taxation.
In some cases, subscribers pay for information, news, case laws, etc. for their daily use. The critical point which needs evaluation here is whether the content downloaded by the subscriber can be shared & therefore subscriber gets right in respect of the copyright. One could argue that the payment made is in the nature of royalty and hence taxable at source. The controversy of copyright v/s copyrighted article lingers on with the judiciary as various judgments have given different views.
The combination of smart phones and internet has led to mobile application which has shifted entire focus on e-business model. The issue which arises here is characterization of consideration received by owner as royalty or FTS.
Base Erosion & Profit Shifting (BEPS)
BEPS refers to the tax avoidance strategies adopted by MNC’s on national tax base. The plan also recognizes the importance of digital economy and proposed to develop new standards to prevent shifting of tax base. It proposed to equip government with instruments to prevent corporations from paying little or no tax at all.
Action plan 1 of BEPS on digital economy give recommendation on challenges faced by revenue authorities while dealing with online transaction. Options proposed are as follows:-
1. |
Consistency – Residence & Source countries should follow the same conceptual basis for sharing tax base between them. |
2. |
Neutrality – Digital & traditional transaction should be taxed equally. |
3. |
Efficiency - Tax rules shall not be burdensome or impose excessive administrative cost. |
4. |
Certainty & Simplicity – Tax rules should be clear & simple. |
5. |
Flexible & Compatible – Tax laws shall not be rigid to keep pace with technology and should not infringe existing tax laws. |
6. |
Consensus – Universally accepted rules shall be applied. |
Concluding thoughts
Technology has not only changed the way business is done but has led us to relook the way taxing rights are shared between countries. Equalization levy has been introduced as a self contained code under action plan 1 as one of the modes of taxing the digital transactions, the application of which is yet to be seen on a wider base in the taxation system of India.