Taxation of E-Commerce

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(1) Growth of e-commerce and concerns emerging therefrom:

(i) The rapid growth of information and communication technology has resulted in substantial expansion of the supply and procurement of digital goods and services globally, including India. The digital economy is growing at approximately 10% per annum, significantly faster than the global economy as a whole.

(ii) At present, in the digital domain, business may be conducted without regard to national boundaries and may dissolve the link between an income-producing activity and a specific location. Hence, business in digital domain doesn’t actually occur in any physical location but instead takes place in "cyberspace." Persons carrying business in digital domain could be located anywhere in the world. Entrepreneurs across the world have been quick to evolve their business to take advantage of these changes. It has also made it possible for the businesses to conduct themselves in ways that did not exist earlier, and given rise to new business models that rely more on digital and telecommunication network, do not require physical presence, and derives substantial value from data collected and transmitted from such networks.

(iii) The growth of e-commerce economy has revolutionized the concept of brick and mortar to click and order. The need for physical presence in a jurisdiction is consequently getting diminished. Therefore, due to transformed business models, communication with suppliers and customers take place virtually and digitally. Emergence of new age technologies such as 3D printing, sharing economy, internet of things etc. has revolutionized new business models in line with the digital epoch making it difficult to identify the location of source or origin point of a business transaction.

(2) Taxation challenges relating to e-commerce:

These new business models have created new tax challenges. The typical taxation issues relating to e-commerce are:

(i) the difficulty in characterizing the nature of payment and establishing a nexus or link between taxable transaction, activity and a taxing jurisdiction,

(ii) the difficulty of locating the transaction, activity and identifying the taxpayer for income tax purposes.

The digital business, thus, challenges physical presence-based permanent establishment rules. If permanent establishment principles are to remain effective in the new economy, the fundamental PE components developed for the old economy i.e. place of business, location, and permanency must be reconciled with the new digital reality. Further, characterizing the income as technical services becomes difficult since the technical services rendered digitally does not involve human intervention, as the digital platforms operate on sophisticated artificial intelligence mechanism. Hence the new digital business models gives rise to ‘stateless income’ and thereby going completely tax free.

(3) G20- OECD Recommendations under Action Plan 1 of the BEPS project:

Due to the tax challenges arising from digitalization, the G20-OECD BEPS Action Plan Committee as part of its 2015 Action 1 Report identified a number of broader tax challenges raised by digitalization, notably in relation to nexus, data and characterization.

The Action Report 1 analyzed the following three options, namely -

(i) a new nexus rule in the form of a “significant economic presence” test,

(ii) a withholding tax which could be applied to certain types of digital transactions, and

(iii) an Equalisation levy, intended to address a disparity in tax treatment between foreign and domestic businesses where the foreign business had a sufficient economic presence in the jurisdiction


It was concluded that countries could introduce any of these options in their domestic laws as additional safeguards against BEPS, provided they respect existing treaty obligations, or in their bilateral tax treaties. The above options can be resorted to as an interim measure until a clear solution emerges on taxing digital economy.

Taking into consideration the potential of new digital economy and the rapidly evolving nature of business operations, it becomes necessary to address the challenges in terms of taxation of such digital transactions. In order to arrive at a long term solution, the OECD along with the BEPS Inclusive Framework is working on arriving at a consensus based solution to tackle the tax challenges arising out of the digital economy as part of a ‘Unified Approach’ under Pillar One.

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