Tax content, service providers: CBDT panel

Anindita Dey in Mumbai

The Central Board of Direct Taxes (CBDT) committee on taxation of electronic commerce (e-commerce) has recommended that the income of content providers, service providers and all other persons engaged in e-commerce should be subject to taxation as is the case of traditional commerce.

The committee, set up by the CBDT under the chairmanship of Mr Kanwarjit Singh, has submitted the draft report and various trade bodies and chambers of commerce have been asked to submit their views before CBDT comes out with the final guidelines.

According to the draft report, the recommendations are based on three basic perspectives of bringing about a neutrality of taxation of e-commerce with reference to traditional commerce, integrity of the tax base through constant monitoring of trade flows, change in technologies and business practices and maintaining international consensus while protecting national interest.

On the characterisation of e-commerce payments, while the committee is of the view that characterisation of income should not change with mode of delivery from physical to digitised form, CBDT should come out with clear position on each category of transaction to ensure uniformity of approach among all assessing officers.

On tax issues in cross border e-commerce, the committee is of the view that the concept of place of effective management should be abandoned as the concept has lost relevance with technological advances in communication and development of teleconferencing.

To this effect, a serious attempt should be made within Organisation for Economic Cooperation and Development (OECD) and UN to find an alternative to the concept.

Till then, the solution could be “source based taxation” only and on this account, provisions of the taxation Acts and double tax agreements do not require any revision on this account.

The committee has also recommended that “base erosion” method as suggested by Professor Doernberg (who presented a paper on base erosion approach at an e-commerce conference last year) offers a possible solution for equitable tax sharing between residence and source countries.

Base erosion method is an approach in taxation of income streams in source countries. It requires taxation of any payment to a foreign enterprise if it is tax deductible in source country in the form of low withholding tax.

However, the committee has also recommended a study to be done to ascertain the extent of erosion of the tax base in India as a result of credit for taxes levied by other countries on exports.

Besides, CBDT should closely monitor the developments and issue guidelines to assessing officers on new emerging categories of transactions through an expert advisory committee. In order to strengthen enforcement issues in e-commerce, the committee has suggested monitoring systems through third party information requirements from intermediaries like Internet service providers (ISPs) and banks.