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Rashmin Sanghvi & Associates

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OECD Parameters



VI. Equalisation Levy & OECD Parameters


CA Rashmin Chandulal Sanghvi

VI.1 OECD Parameters: Criticism / Issues:

A G20 / OECD Task Force’s Action 1 Report on E-Commerce asks countries to develop a solution within the parameters of OECD Model Convention on DTA. Clearly Equalisation Levy is NOT within the parameters. Why? (Para 1.1 to 1.4 below)

B What are the consequences on its constitutionality? What will be the impact on discussions within OECD / G 20? (Para 1.5, 1.6 & 1.7 below)


1.1 Fact:

OECD has accepted that the “Rules of International Taxation” as drafted by OECD are inadequate to deal with modern international commerce. And yet it is not ready to change the parameters. What is India supposed to do?

1.2 My Submission:

Truth is simple. When it is told in a simple language, in a straight forward manner; it helps in “diagnosing” the problem & “searching” for a solution.

When the truth is hidden behind vague & diplomatic language, the “diagnosis” and “search” both are delayed. May be, even by 20 years.

When existing rules are outdated; and

someone does not want you to find a solution;

it is natural that you will have to travel beyond the existing rules/parameters.

1.3 Parameters: Illustration: Compare & contrast Hindu Law (H) with OECD Model (O).

H Before the year 1956, Hindu law provided that:

(i) Daughters could not inherit share in parents’ estate.

(ii) Women could not be co-parceners in an HUF.

(iii) Manu Smruti (Source of Hindu tradition) provided for four Varnas. “Shudras” had no rights.

Hindu Succession Act is expected to be within the parameters of Hindu Law. Suppose, a Hindu said in the year 1956 (when Hindu Succession Act was passed): “I admit that under the existing Hindu Law, there is injustice to women & shudras. You may find a solution. But stay within the parameters of Hindu Law.” Could you find a solution to give True & Fair Justice to all?

H Core Truth of Hindu religion is that:

Every “Vyakti” (every individual life) is a manifestation of “Samashti” (Brahman). How can there be a difference between a man & a woman; or a Brahmin & a Shudra? The differences have been created by vested interest lobbies who have exploited the artificial differences and benefited from them.

H The Hindu law & Manu Smruti are outdated & incapable of leading modern society where:

Woman & man are equal; and

Every human being is equal irrespective of his/her gender, colour, religion & caste. Constitution has accepted & declared “Equality for All” as the fundamental principle. Other laws & rules have to be based on this “fair & just” principle.

H Followers of The Constitution and The Hindu Succession Act are still within the parameters of “Hindu Law”.

O Similarly, the core principle of Double Tax Avoidance Agreements is:

Share the tax revenues due on international incomes between COR & COS in a just & fair manner.

OECD model of DTA has been drafted by clearly vested interest lobby – OECD. And the main countries who dominate drafting of the model have benefited from current model. And they do not want to allow any modifications that may erode their vested interest.

VI.1.4 H & O: When tradition is outdated, to the extent unavoidable, we have to break the tradition. And still remain within the main-stream.

This is what Equalisation Levy attempts to do.

Government of India (GOI) has not disturbed anything which need not be disturbed.

It is evident that the principle of distribution of international tax between COR & COS should be just & fair. Anything that is recognised to be at variance with “justice & fairness” has to give way.

An interesting Tragic - Comedy arises when:

H Some radicals want to break the Brahminical monopoly over Hindu religion. They want to show the Just & Fair principles. And large number of shudras protest against any change in established traditions.

O Some radicals want to break OECD model parameters to the extent it is unjust. And Indian professionals rise in protest.

God Bless All.

1.5 Constitutional Validity:

My View: No tax authority and no Court in India is bound by OECD model & OECD commentaries. They are bound only by the treaties signed by Government of India. OECD commentaries have good knowledge value as long as portions of it are reasonable. Where the model & commentaries are biased, they have to be disregarded.

Any Indian law to be valid under Indian Constitution does not have to be “within the OECD parameters.”

1.6 How will India discuss at BEPS group discussions? OECD has no solution to a problem which it has recognised & admitted.

AND BEPS Action 1 report makes it difficult for anyone to find a solution. There are some specific vested interests that do not want any modification in OECD model to the extent of E-Commerce taxation.

Let us say: “YOU are the judge”.

The issue is before your Court.

Who should be answerable?

(i) OECD & the vested interest Government that prevented the just & fair solution;


(ii) Government of India?

1.7 I understand that several countries around the world are searching for a way out to tax E-Commerce revenues. Different Governments are coming out with different versions. In a few years, majority Governments will be taxing E-Commerce in one way or the other.

When rules & traditions become redundant; they have to give way to new rules & traditions. If Vested Interests won’t change voluntarily, nature will force change.

VI.1.8 Please appreciate that:

OECD has accepted in writing, in its BEPS Action 1 report that Existing Rules of International Taxation are inadequate to deal with E-Commerce (Please see Annexure I for specifics). They are trying to find new rules. When new rules are to be brought in, the parameters have to change. OECD itself has proposed a few options for the new rules.

Compare: You have a set of traffic rules for motor cars and trucks plying on the roads. Another set of rules for waterways. But for the air-traffic rules, the parameters will change significantly. Similarly, tax rules for E-Commerce business have to be different from the tax rules for traditional, tangible commerce.

VI.1.9 BEPS Action 1 Report October 2015 – 4th para of the “Foreword” clearly says:

“……It is expected that profits will be reported where the economic activities that generate them are carried out;


Where value is created.”

No one can deny that - Value is also created at the place of sales. This issue has been accepted in the commentary by late Prof. Klaus Vogel; and by European Union (EU). EU is working on ‘Significant Economic Presence’ (SEP) & ‘Formulary Apportionment of profits’. One of the criteria for apportionment will be sales. Despite the conceptual issue that - “the Country of Sales / Market should get an attribution of profits”; existing rules on International Taxation, Domestic laws & Double Tax Avoidance Agreements do not attribute any profits to the COS. These parameters have to be changed.

VI.1.10 Please see an extract from BEPS Action 1 report given in Part VIII Annex. 3. Form an independent opinion – whether Equalisation Levy is proper or not.

VI.2 OECD Guidelines

OECD Ottawa report on E-Commerce in the year 1998 stated that E-Commerce Taxation should provide:

“(i) Neutrality

Taxation should seek to be neutral and equitable between forms of electronic commerce and between conventional and electronic forms of commerce. Business decisions should be motivated by economic rather than tax considerations. Taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation.

(ii) Efficiency

Compliance costs for taxpayers and administrative costs for the tax authorities should be minimised as far as possible.

(iii) Certainty and simplicity

The tax rules should be clear and simple to understand so that taxpayers can anticipate the tax consequences in advance of a transaction, including knowing when, where and how the tax is to be accounted.

(iv) Effectiveness and Fairness

Taxation should produce the right amount of tax at the right time. The potential for tax evasion and avoidance should be minimised while keeping counter-acting measures proportionate to the risks involved.

(v) Flexibility

The systems for the taxation should be flexible and dynamic to ensure that they keep pace with technological and commercial developments.”

My responses to the OECD Guidelines: Neutrality means – Same taxation rules should apply to traditional commerce as well as to E-commerce. This is possible only if the rules determining COS jurisdiction (including definition of PE) are modified to take care of E-commerce business. Since these rules are not modified, neutrality cannot be invoked at present. Whenever the OECD model convention is suitably modified; even neutrality can be accomplished.

All other characteristics of a good law are largely satisfied by Equalisation Levy.

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