TAX SERIES: CONCLUSION & DISCUSSION.
Having examined all facets of digital economy issues in India and in order to conclude the series, we are here to put the final nail in the coffin.
There is an inherent tension between the opportunity of collecting tax revenue as well as the pressure that that is placed on India to address concerns over challenges in taxing digital economy. These concerns not only include taxation but India entering into global market tends to hinder various aspects of law. The tension in privacy laws, labours laws, Information Technology have also been highlighted. India has recently developed as digital economy and thus has realised its gaps between domestic and international regime.
In fact, there are some challenges on which international regime stands silent. This leads to the situation wherein Indian government simply started amending its laws, when cross-border transactions gradually pacing up. It is evident that digital economy introduced various business models that deprived and supported from internet. This led to many challenges in the system which ultimately resulted in explicate increase in amount of tax revenue loss by Indian government.
Notwithstanding, tax reforms are necessary for evolution with business models that India has experienced. However, India law system realised that its laws could not provide proper guidelines for the same. It is to be argued that India has tried to resolved its challenges by introducing many concepts. Providing that, international regime is as essential as national law. As per the international regime perspective, Organisation for Economic Co-operation and Development (OECD) constantly tried and came out with a report providing Action Plans to address challenges in the global trade. Tax reforms considered to be the expected steps taken for the smooth functioning and transparency in international regimes about countries having their respective taxing rights in cross-border transactions. It is recommended that various safeguards that were mentioned in OECD 2015 report as discussed in previous chapters may or may not be advantageous for Indian economy. There is no single framework in use for countries. Each country has its own and independent framework irrespective of treaties signed between India and other country. Unilateral as well as multilateral measures to address tax challenges born in digitalization of the economy.
A brief about challenges have been discussed in the paper. One of the major challenge India faced like any other economy is jurisdiction. Regarding this, Permanent Establishment new nexus rule knows as Specific Economic Presence was introduced. It is considered to be a important change that India desired as per the circumstances. Digital trade is characterised as tangibles and intangibles that is goods and services. Certain Indian laws are deemed appropriate for taxing business in products. Moreover, services were never part of any provision under Indian statutes before digital economy has evolved. Minimal presence on air or physical is deemed to be taxed in India. Therefore, resulting in government reviving their revenue from multinational companies thereafter. The issue of taxation is very complex and therefore most of the companies have substantially survived to avoid tax in India. It is been argued that the principle of separate individual entity refrains multinational corporations from including profit shifting in their tax planning. Tax planning has caused tax avoidance in many countries. Introducing a global minimum effective corporate income tax rate on all the profits attributed by MNCs would obstruct tax competition between countries and certainly prevent tax arbitrage. An average rate would prevent MNCs to not transfer their profits from one jurisdiction to another. Along with strengthening of the legal framework, efficient administration must be created for monitoring of all e-commerce transactions. Better auditing procedures and authorization must cope up with the pace laws are amending in India. The implication of OECD BEPS Project was examined and has taken multifaceted aspects of e-commerce, knowingly that international as well as domestic tax provisions were inadequate to respond to the peculiarities of challenges in taxation of digital trade. It is still quite evident that MNCs take undue advantage of national systems of taxation laws and tax treaties as well.
It is to be argued that multinational corporations tax planning Is more than tax avoidance. Transferring profits from actual jurisdiction from high rate to low or no rate of tax. Transfer pricing accelerated tax avoidance in a way that it stands legal. Services related to Intellectual property or any digital services created opportunities for the companies to operate in a way that price could be easy transferrable within different entities in different jurisdiction under the same parent company. Safeguarding of tax base was necessary. It is observed that Indian authorities thought their system is ready however loss in tax disputes evidently states something else. However, it is to be noted that the OECD guidelines of transfer pricing stands irrelevant with respect to Indian domestic laws. Guidelines of OECD are somehow not favourable in India which would suggest that it may lead to vigorous tax competition amongst countries.
Another formulated measure to have a great and positive impact on Indian tax revenue is Equalisation Levy. Although there is a recent amendment in change from 6% to 2%. But the amount procured by the government since 2016 stands remarkable. The amendment has widened the scope and has taken e-commerce operators in its tax net to collect more revenue.
On the other hand, existing international regime is silent on many conceptual challenges. It demands reviewing its features in this system. International tax issues have never been on top as agendas as they are now. International regimes are forced to be amended by amalgamation of economies and their markets in recent years. Rules were made years ago and so the treaties
It is been observed that Indian government adopted various measures regarding tax tech companies which are a new nexus Permanent establishment rule known as significant economic presence, concept of equalisation levy, BEPS Action Plans and various amendments in its Income Tax Act to widen the scope and to cover as much as possible to protect their tax revenue from the multinational entities and also to have a fair bit of tax from cross-border transactions in digital era. It is quite evident that e-commerce in India is witnessing a rapid growth and will grow until 2024 undoubtedly. It is been said that Indians have more access to Internet than toilets. More and more businesses are being introduced online. People think e-commerce is a convenient as well as have benefits of online presence. It has become the most common method for carrying out a business in India. People have started small business. Some said that India has no strong regulatory law for e-commerce except IT Act.
Needless to say that Indian tax system still improving to eliminate each and every loophole in national tax regime with respect to cross-border transactions in order to support international tax system for better smooth functioning of taxation of cross-border transactions in digital economy I India. Weakness in the current regime is evident and circumstantial and does create lot of opportunities to base erosion and profit shifting. As, recently India has lost two main tax disputes which shows that India still requires to amend its law. Policy makers still need to go look for the loopholes in our system. After undertaking of this detailed study of multi business models evolving in digital economy. Many issues arose subsequently with respect to taxation. The problem is identification of the basis of taxation and profit sharing. A consensus of international perspective is what is required to provide a sufficient solution. Online advertisement is the inseparable portion of these type of virtual transactions. They cannot be left grappling with uncertainty and under the provisions of no law. The stakes are high. Clarity in this regard is inevitable to ensure the Government’s goal of ‘reducing litigation’. The ghost of uncertainty in taxation should not eclipse the digitization process.
– Written By: Ujjwala Gupta, Senior Legal Counsel, SUO
