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Taxing E-Commerce Transactions!

Published on Mon, Jan 28,2013 | 18:00, Updated at Mon, Jan 28 at 18:00Source : 

By: Pallavi Singhal, Associate Director & Vikash Dhariwal, Manager- Tax & Regulatory Services PwC

Internet which turned 30 this year has revolutionised the way business is conducted and is expected to continue to change the business landscape in coming days. The use of web to conduct business has led to the birth of the new phenomenon called ‘E-commerce’. Simplistically speaking, E-commerce refers to consummating commercial transactions via electronic means. Undoubtedly, E-commerce seeks to bring out efficiencies of trade in the virtual space to benefit ultimate consumers with the added comfort of sitting at home.

In the recent past, E-commerce transactions continue to challenge tax administrations given the often multi jurisdictional nature of the transactions and the potential anonymity of the parties. Often transactions are concluded over the internet which pose challenges as regards place of residence of the contracting parties, place of conclusion of contracts, acceptance of the offer, characterisation of the income generated etc. Absence of specific guidelines in this regard result in Revenue taking a very myopic view of the matter lest there should be ostensible loss to the exchequer and taxpayers using the AAR as a favourable destination to buy insurance against any potential tax risk.

Ordinarily, the taxability of traditional modes in the hands of the non-residents is based on the source rule. Business profits are ordinary taxed in the source country only if the overseas entity creates a Permanent Establishment (‘PE’). Generically speaking, PE is defined to mean a fixed place of business though which the business of an enterprise is wholly or partly carried on. Such concepts become irrelevant in the context of E-commerce transactions in absence of physical location.

Settled principles of law and fact get questioned basis the form of the transaction being an e-commerce arrangement. A pertinent example to deliberate upon would be that of provision of digitised goods such as software or music to be downloaded for use by the recipient or access to web based documents.  Characterisation of income generated from the same to be in the nature of royalty taxable in most jurisdictions or business profits not taxable in absence of creation of a PE would be the typical bone of contention. It is an accepted phenomenon that should the same good be sold in non-digitised form (physical form eg. a book or a CD or mere subscription of journals) it would be regarded as sale of goods not resulting in royalty. The mere alteration in the form of the transaction leads to differing interpretations with the Revenue using its unilateral discretion to tax - causing hardship to businesses. Ideally speaking, the rules for taxability should be neutral to the form of the transaction being in the nature of an E-commerce transactions or transactions through conventional modes. Unfortunately, tax laws do not move in tandem with technological advancements, which results in ambiguity and in turns causes unwarranted litigation.

The OECD Committee on Fiscal Affairs in January 1999 had set up the Technical Advisory Group (TAG) on Treaty Characterisation Issues arising from E-Commerce with the general mandate "to examine the characterisation of various types of electronic commerce payments under tax conventions with a view to providing the necessary clarifications in the Commentary”. The principal issue addressed by the Report was the classification of income as business profits or royalty or technical fees or otherwise. The Report analyses 28 different categories of typical E-Commerce transactions, like electronic ordering and downloading of digital products, downloading of software and other digital information license, application hosting, data warehousing, online shopping portals, etc., which provides good guidance to deal with the various aspects of E-commerce transactions.

Extant tax laws in India do not specifically provide for rules for determining taxability of E-commerce transactions. Certain countries like Singapore, UK and the USA have enacted specific tax legislations to deal with various aspects like levy of VAT, taxability in cases of location of websites in or outside the local jurisdiction, withholding taxes, permanent establishment issues, etc. At India level, the Government of India had set up the High Powered Committee (‘HPC’) to analyse and recommend the issues relating to E-commerce and the Committee had submitted its report in February 2001. The HPC has also emphasised the need for neutrality between taxation of E-commerce and the commerce carried on in traditional manner. One of the important recommendations is that the concept of PE be abandoned and a serious attempt should be made within OECD and UN to find an alternative to the concept of PE. The alternative recommended by the Committee is based on “base erosion” approach which requires taxation of any payment to a foreign enterprise, if it is tax deductible in the hands of a taxpayer in the source country. Further, the HPC examined each of the categories analysed by TAG and provided its comments thereupon. In 15 categories, the characterisation by the OECD and the views of the Committee match. In one category, the views match in terms of the Tax Treaties and not the domestic law. In remaining 12 categories the views of the Committee differ from the views of the OECD. However, at policy level, the Committee agrees with the view that the characterisation of incomes should not change with the mode of delivery from physical to digitised form.

Such initiative on the part of the Government is a step in the right direction; however, there has not been any significant traction on the same and it merely continues to have guidance value. The need to the hour is to give shape to the guidelines with appropriate inputs from all the stakeholders to avoid unwarranted litigation and at the same time protect interests of the Revenue.


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