Features of businesses in the digital landscape are vastly different from those of typical brick and mortar businesses. These features include mobility, reliance on data, use of multi-sided business models, and volatility. However, tax policies still function on traditional concepts of territory and residence. They were designed to tax physical businesses and are not adept to handle ones that are conducted online. By playing on these gaps, practitioners in the digital economy are able to ‘legally’ avoid, or at least substantially reduce their tax burden. Therefore, devising a mechanism to appropriately tax the digital economy has become a popular agenda in international policy debates.
Against this backdrop, our report “Taxation of Digital Economy in India – The Way Forward” first identifies the gaps in the taxation system that prevent the digital economy from being adequately taxed. The report subsequently discuss the work of international organisations such as the Organisation for Economic and Cultural Development, the United Nations and the European Union on the subject. While it seems that the long-term solution to effectively tax income earned by the digital economy is amending the international tax treaties, in the interim, many countries have adopted unilateral measures. In this report, we briefly analyse these unilateral measures introduced by countries such as Italy, United Kingdom, Australia, Israel, Hungary, Spain and Colombia.
We also analyse the unilateral measures adopted by India in detail. The first of these, being Equalisation levy, which has been introduced in India to tax certain specified digital services, where consideration is provided to a non-resident, by a business either residing in India or having a Permanent Establishment here. In this section, we study the nature of Equalisation levy, its constitutional validity and also analyse its impact on the problem of double taxation. Another measure adopted by India, is the introduction of the concept of Significant economic presence of non-residents under the Income Tax Act, 1961 (‘IT Act’). While this concept is not effective at present, we analyse the provision added to the IT Act introducing significant economic presence and identify areas that require reforms before the provision is made effective. Lastly, we analyse the impact of data localisiation that mandates digital businesses to host servers in India. While the Reserve Bank of India has made data localisation mandatory for certain business, it is still at the stage of a proposal for a majority of digital business models. We study the impact of such mandates on the income tax regime. Based on our analysis of the global position and the Indian position in our report, we suggest the way forward to tax income from digital businesses in an equitable and effective fashion.