View: Are we ready for a digital tax?

In India, the digital economy is pegged at about $450 billion. It is expected to grow to over $1trillion in the next 3-4 years. So, what are the elements that encompass the entirety of digitalspace? Are we geared to handle this evolutionary phase from a tax standpoint? The expansive digital world would include e-commerce, app stores, crypto currencies, Internet of Things (IoT), Big Data and cloud computing, among others. As a taxpayer, is there clarity on the taxes to be paid for digital transactions?

The Organisation for Economic Cooperation and Development (OECD) and the G20 nations constituted the Base Erosion and Profit Shifting (BEPS) project that typically targets tax strategies aimed at artificially shifting profits to low or no-tax locations. Action Plan 1of this project deals with the tax aspects of the digital economy.

What are the key tax challenges faced by taxpayers in this industry? The Indian income tax (I-T) law was drafted about 60 years ago. Though amendments were made to tackle some of the changes in the industry, they were more afterthoughts. There was a significant amount of litigation around whether payments to a non-resident for broadband services or a software licence would warrant the withholding tax or not.

While the law was amended retrospectively to tax these transactions, these gave rise to other questions. In a commercial transaction executed and concluded, say, two years prior to this coming into force, who will bear this cost? The buyer of services, or the seller? Will the taxpayer receive a tax credit, or a deduction for such costs?

Prolonged litigation accumulates costs that a taxpayer incurs on the transaction. A comprehensive tax code that covers potential transactions will drastically reduce the litigation and related costs.

‘Equalisation’ is a new levy introduced a couple of years ago to bring to tax payments made for online advertisement services. Prior to the equalisation levy, courts have held that payments made to overseas non-residents for advertisements cannot be taxable in India. Hence, there was no withholding I-T applicable on payments.

Interestingly, this aspect continues to be a topic of debate between taxpayers and tax officials for periods prior to introduction of equalisation levy. The levy itself was introduced as a separate chapter in the Finance Act, administratively linking it to direct tax laws. But is it an I-T? Clearly not. Is it then in the nature of an indirect tax? Not really. By introducing a levy that’s neither an I-T nor an indirect tax, neither the Indian taxpayer nor the entity against whose income the deduction is made can claim a credit. 

Taxpayers engaged in digital technology space have very limited avenues for claiming I-T incentives. Largesized MNCs claim special economic zone (SEZ) incentives for exports.