The rise of e-commerce and internet businesses, the increased use of smartphones, growing data consumption and the latest buzz around digital payments have helped the Indian economy march on the path of Digital India.

As business houses attempt to reach out to a wider set of stakeholders, their technology spend is expanding.

Further, there are a host of taxes and duties that are being levied or are proposed to be levied on B2B and B2C transactions undertaken on the digital platform.

The equalisation levy
Since there is a dominance of non-resident players providing services on digital platforms, Indian business houses have been availing of the services (for example, online advertisement) from such players to expand their digital footprint. Payments to non-residents for online advertisements and related services have been made subject to Equalisation Levy (EL) at the rate of 6 per cent, a new tax introduced by the Finance Act 2016.

The CBDT committee that was formed to discuss the scope and applicability of EL had, in fact, recommended 13 services to which this levy could potentially be applied to. Moreover, digital transactions through mobile and over the internet are increasingly agnostic to factors such as physical place and time, which are considered vital for the distribution of taxation rights between countries.

Such digitally enabled transactions pose multiple questions from an income tax perspective, namely, determination of source of income, existence and extent of nexus with permanent establishment in the source country, and so on.

Thus, non-residents with a source of income in India through their digital platforms outside the country are confronted with questions around the taxability of such receipts in India. In the event that EL were to apply, non-resident recipients of income will be exempt from income-tax on the said income. If the non-resident recipient has a permanent establishment (PE) in India, then EL would not apply and therefore, income-tax provisions can become applicable.

If, at the time of payment, the payer has deducted EL presuming non-existence of a permanent establishment of the non-resident recipient , and later at the time of assessment if the tax authorities allege that the said non-resident has a PE in India, several challenges arise. For example, there is the possibility of claiming refund of the EL deducted, income-tax liability in relation to PE, etc.

On another note, whether credit of EL would be available to non-residents in their home country would be subject to interpretation under home country laws.

From a service tax perspective, the recent imposition of 15 per cent tax on cross-border B2C digital supplies would make them correspondingly expensive for end consumers. The scope of digital supplies is kept wide to cover services delivered over the internet or any electronic network.

The OECD guidelines recommended this move to create a level playing field for local and overseas digital supplies.

Foreign service providers would be required to analyse the detailed provisions in this regard in order to comply with this requirement to register in India and pay this tax.

Another mammoth compliance requirement for e-commerce players, this time for domestic companies, under the proposed GST framework, involves the tax collection of source (TCS) provisions for all supply of goods and services made through their portals by sellers where payment is collected by them and passed on. The 2 per cent tax to be collected and deposited on the seller’s behalf and subsequent state-wise monthly return filing requirement would imply a high compliance burden on e-commerce operators, apart from discouraging sellers even though they may be below the threshold limit under GST.

These steps are seen regressive in the context of Digital India. Since digital transactions are subject to several taxes and levies, and there are ambiguities around the applicability of certain taxes, it may not be unjustified to expect the Government to create an enabling tax framework and come up with unified tax proposals.