When businesses were simple and transactions were local, accounting standards were simple and local GAAP (generally accepted accounting principles) were sufficient.
Technological advancements have transformed the way business is transacted across the world and facilitated greater access to global markets. Given the economies of scale, an increasing number of businesses are going global via digital platforms. The increasing consumer demand in emerging economies has led to phenomenal growth in the e-commerce sector. India’s e-commerce market has reached revenues of $16.7 billion and with the recent demonetisation move, the country is moving towards a digital economy.
One of the important drivers are the tax consequences of digital transactions. Given the pace of technological advancements, the existing tax regime, which is predominantly based on brick and mortar business models, has not kept pace with changing business dynamics and technological trends. The fluid structure and unique features like substantial use of intangible assets, determination of place and mode of rendering of services gives rise to unique tax challenges.
Recognising this, OECD as part of its BEPS project, focused on tax challenges posed by the digital economy as one of the action points. The BEPS report on the digital economy recommends modes such as withholding tax on certain types of digital transactions, equalisation levy and consumption-based taxation, among others, to address the tax challenges.
Taking a cue from the report, the government had also introduced ‘equalisation levy’ at 6% on certain specified services, which include online advertisement and provision for digital advertising space or any other facility or service provided by non-residents. Further, additional services may be brought within the ambit of equalisation levy and it is expected that the scope of the levy would be enhanced in the coming years. While the levy provides for a mechanism to collect tax on the specified services, the challenge of claiming tax credit may lead to additional tax costs in the hands of the transacting parties. Additionally, there is a need for clarity on the definition as the scope of the term ‘online’ or ‘any provision for digital advertising space or facility for online advertisement’ is too wide. This needs clarification by way of examples.
Another important element of e-commerce transactions is the characterisation of income with a resultant impact on withholding taxes. For example, payment gateway providers typically collect payments from customers and remit the same to e-com companies after retaining their fee. Such fees should not qualify as commission as the payment gateway providers do not act as agents, nor do they qualify for fees for technical services, as the services are standard. Notifications were issued to exempt merchant establishments from deduction of taxes on payments made to banks for settlements or any payment system company authorised by RBI. However, such exemptions have not been extended to payment gateway service providers. Similar issues also exist in case of payment for cloud services, data warehousing, etc.
It is important for the government to take a long-term growth perspective and provide clarity on tax issues emerging out of the digital economy. This will supplement government’s efforts towards driving digital growth.
by, Pallavi Singhal
(With contribution from Vikash Dhariwal, associate director and Manoj Shenoy, manager at PwC)
The author is partner – direct tax, PwC. Views are personal