Taxation Challenges of the eCommerce Transactions

Abstract

E-commerce transactions are progressively gaining prominence in our day to day life. The world is fast becoming digital. Businesses all over the world have started digitalization of their processes to be ahead of the competition or else be eliminated. With the increase in the number of cross border e-commerce transactions both in quality and quantity, every Government wants its fair share of taxing rights in cross-border transactions. The current concept of Permanent Establishment is not adaptable to the era of cross border e-commerce transactions, where business transactions can be effected in another country without having a Permanent Establishment in that country. An alternative to the concept of Permanent Establishment is required to be adapted for better allocation of taxing rights with the fair share of Income being taxed in respective tax Jurisdictions. newlineThis thesis explains the growing taxation challenges of E-Commerce transactions entered into within and outside India. In particular, taxation of businesses which are devoid of any physical presence in India but earn substantial revenue from India, i.e., having Economic Substance in India has assumed importance. E-commerce transactions should be taxed where substantial economic presence is located, and values created. newlineThe thesis tries to address these challenges by recommending relevant changes in the current tax structure so that legitimate profits are taxed in India. The current tax structure in India is not adequately geared to tax the fair share of Income arising from e-commerce transactions with particular reference to the definition of Permanent Establishment, Equalization Levy, OIDAR Services, all subject to the bar on the extraterritorial operation of tax laws. newlineThe Government of India in its Finance Act, 2018 introduced the concept of Significant Economic Presence ( SEP ) in the Income-tax Act, 1961 ( the Act ) for taxation of non-residents in India by expanding the scope of the definition of Business Connection through Explanation 2A to section 9(1)(i) of the Act. The definition of Business Connection , stated that a non-resident s significant economic presence in India shall constitute business connection of the non-resident in India and the significant economic presence for this purpose shall mean- newlinei. Transactions pertaining to any goods, services or property carried out by a non-resident in India, including the provision for download of data / software beyond a specific revenue threshold or newlineii. Continuous and uninterrupted soliciting of business activities or engaging in interaction in India with a specified number of users through digital means. newlineThe Government of India is in a consultant process wherein the Government of India has invited comment and suggestion from the stake involved to determine the revenue threshold and the number of user threshold for SEP. newlineIn view of the above, European Union for its member states in its press release dated 21st March 2018 has proposed that a Digital platform of a company in its member states is to have a taxable digital presence upon meeting any of the following criteria:- newline(i) Exceeds a threshold of Euro 7 million in annual revenue in a member state newline(ii) A Member state having more than 100,000 users in a taxable year. newline(iii) Over 3000 business contacts for digital services created between the company and business users in a taxable year. newlineIt has also proposed (proposal 2) a tax rate of 3% on revenue generated from activities wherein users play a major role in Value Creation and which are difficult to apprehend with current tax rules such as;- newline(i) Selling online advertisement space newline(ii) Digital Intermediary Activities i.e., providing a market place ( a platform to do business ) newline(iii) Sale of data generated from user-provided information. newlineThe second proposal will only apply to companies with total annual worldwide revenue of Euro 750 million and EU revenue of Euro 50 million. newline