Digital Economy: Equalisation Levy

In this era of technology intertwined lifestyle, e-commerce has become a way of life. E-commerce seemingly facilitates every other aspect of our lives at a click of a button, whether its procurement of daily household items or requisitioning of any particular service. Today, accessibility to the digital world is not a privilege but a necessity for most people, particularly in urban areas.

Over the past few decades, the burgeoning development of the Information and communication technology ('ICT'), its accessibility and affordability has led to this digital revolution around the world. ICT has also provided opportunity to businesses to tap the world markets and bridge the requirement of physical presence across the globe.

The model of doing business electronically has provided immense growth opportunities.Digital economy across the world is reflecting a growth rate of 10%¹ which is significantly higher than the growth numbers of the global economy as a whole. Research and studies around the world have indicated that investment in ICT positively affects the productivity and GDP growth of a country. Developed countries in terms of ICT development have the highest GDP levels, which indicates that implementation of ICT in a country improves its overall economic health.

Despite the significance of ICT in overall development of an economy, ICT quotient has remained low in India. Though, in past few years, India has witnessed some successful start-ups in this field, development of the concerned infrastructure is much needed to capitalise on the growth opportunities. Foremost India has to bridge the urban-rural hiatus in terms of the communication infrastructure. With the NDA government vision of Digital India, it is expected to embark a digital revolution in India and to achieve the desired growth rates.

Albeit, this model of conducting business through the realms of cyberspace has led the enterprises in procurement and selling of goods and services in different jurisdictions without any physical presence in that country, the same has also led to severe tax challenges direct as well as indirect. The economic presence in a sovereign through the world of web has posed direct taxation concerns due to absence of physical presence in that specific jurisdiction.

The development of the cyber economy has captured the attention of the taxman of the world economies to test their fundamental Permanent Establishment rules developed for old 'brick and mortar' economies, in the light of the tax challenges caused by the new digital business models. The digital market has revolutionized traditional ways of conducting business around the globe, while tax rules have been slow to adapt to this new business environment and could not come up with the possible solution.

It is widely felt that MNEs have treaded the path of aggressive tax planning thriving upon the interaction of tax laws and treaty provisions between different sovereigns and have relatively paid low amounts of tax or no tax by artificially shifting profits away from the economy where they are earned, to a more favourable tax jurisdiction. This has led to a divide between the economic presence in a country vis-a-vis taxable presence in such jurisdiction.

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