Section 1 - Constitution and Mandate of the Committee
Objective of the Committee’s Work
1.1 Introduction
1. With expansions of information and communication technology, the supply and procurement of digital goods and services has undergone exponential expansion everywhere, including India. It has also made it possible for the businesses to conduct themselves in ways that did not exist earlier, and given rise to new business models that rely more on digital and telecommunication networks, do not require physical presence, and derive substantial value from data collected and transmitted through such networks. These new business models have also created new tax challenges in terms of nexus, characterization and valuation of data and user contribution. These challenges have been recognized by the international community, leading to their inclusion in the Base Erosion and Profit Shifting (BEPS) Project endorsed by G-20 and OECD. The findings and conclusions of Action 1 of this Project aimed at addressing these challenges, resulted in the publication of a detailed Report in September 2015 that has since been accepted and endorsed by the G-20 and OECD and thus provides a broad international consensus on these issues.
2. The issue of characterization of payments related to digital goods and services, and the inherent ambiguities therein, have been universally recognized as a challenge. These issues are faced more commonly by countries like India, which have included provisions that allow taxing rights to the source jurisdiction to tax royalty and fee for technical services in their tax treaties, and thereby have a difference in position with the OECD in respect of these provisions. The combination of inadequacy of physical presence based nexus rules in the existing tax treaties and the possibility of taxing such payments as royalty or fee for technical services creates a fertile ground for tax disputes, particularly in countries like India, where the taxpayer rights are fully protected by the appellate authorities, and imposition of tax under ambiguous laws are often not sustained.
3. The ambiguities in taxation of income arising from the digital economy, and the resultant tax disputes are also a constraint for the taxpayers, who may end up getting subjected to inconsistent approaches on the part of assessing as well as appellate authorities, making the tax regime in respect of such income ambiguous and unpredictable, a situation which has been noted as an area of concern by the taxpayers as well as tax authorities.
1.2 Constitution of the Committee
4. Recognizing the significance of issues relating to e-commerce transactions and the need to have a simple way to resolve them and bring greater clarity and predictability in the applicable tax regime, the Central Board of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance, directed that a Committee be constituted, whose terms of reference should include detailing the business models for e-commerce, the direct tax issues in regard to e-commerce transactions and a suggested approach to deal with these issues under different business models. It was further directed that the Committee may include experts from industry and officers from CBDT and the field and also a nominee from the Institute of Chartered Accountants of India.
5. Accordingly a committee was constituted consisting of the following members1:
(i) Shri Akhilesh Ranjan, Joint Secretary (FT&TR-I), CBDT, Department of Revenue,
Ministry of Finance & Chairman of the Committee
(ii) Ms. Pragya Sahay Saksena, Joint Secretary (TPL-I), CBDT, Department of Revenue,
Ministry of Finance
(iii) Shri Pradip Mehrotra, Commissioner of Income Tax (ITA), CBDT, Department of
Revenue, Ministry of Finance
(iv) Ms. Chandana Ramachandran, Commissioner of Income Tax (International Taxation),
Bengaluru
(v) Shri Nihar N Jambusaria, Chairman, Committee on International Taxation of the ICAI,
representative of the Institute of Chartered Accountants of India (ICAI)
(vi) Shri Pramod Jain, Head of Taxation, Flipkart, Industry representative
(vii) Shri Rashmin Sanghvi, Chartered Accountant, Expert on International Taxation and
Taxation of E-Commerce
(viii) Dr. Vinay Kumar Singh, Director (FT&TR-I), CBDT Department of Revenue, Ministry of
Finance & Member Secretary of the Committee
1.3 Work of the Committee
6. The Committee held its meetings in New Delhi from time to time to examine the issues and find possible alternatives to address them. Part of the work was undertaken by members working in sub-groups, as decided by the Committee. The Committee heavily relied upon the BEPS Report on Action 1, wherein the new business models of digital economy as well as the tax challenges arising from it in respect of nexus, characterization, valuation of data and user contribution have been examined in detail. The BEPS Report also identifies options to address these challenges and also recognizes the right of countries to adopt any of those options in their domestic laws or bilateral tax treaties. The Committee took note of the fact that India was an active participant in the BEPS Project, including Action 1, and the BEPS Report on this action has been endorsed by the G-20 and OECD countries.
7. The Committee took note of all aspects of digital economy that have been recognized and taken note of in the BEPS Report on Action 1, keeping the Indian context in view, and explored possible options to find a solution in accordance with the conclusions of this report. The Committee aimed at identifying a solution that will provide simple, predictable and certain taxation of digital economy. This Report is a result of this endeavour.
1.4 Organization of the Report
8. The following sections of this Report are organised in the order that the Committee approached the issues. The second section notes the current status of digital economy and its future growth projections. Section 3 details the tax challenges arising from digital economy and the work in Action 1 of the BEPS Project undertaken in this regard. Section 4 details the observations of the Committee related to the need for achieving tax neutrality between multinational enterprises and domestic enterprises, as well as between digital and traditional (brick & mortar) enterprises. Section 5 provides an overview of the underlying principles for allocating taxing rights between the jurisdiction of residence and the jurisdiction of source, the factors that lead to profitability of businesses, and a historical review of existing rules. Section 6 identifies the tax challenges in digital economy that have now been recognized by the international community, including those related to nexus and characterization, as well as the tax disputes that can arise from them, particularly in the Indian context. Section 7 takes a look at the issues related to valuation of data owned by residents in the source jurisdiction and their contributions as ‘users’ in the profitability of the enterprises in multidimensional business models. Section 8 reviews the recent international literature on tax issues arising from digital economy that was also taken cognizance of during the BEPS project. Section 9 details the options identified by the BEPS Report on Action 1, and their conclusion that countries may adopt any of these options in their domestic laws or bilateral tax treaties. In Section 10, the Committee puts forward a proposal for the Equalization Levy that can be adopted under Indian laws. Section 11 provides a summary of the conclusions and recommendations of the Committee.
1. Ms. Krupa Venkatesh, Head of Taxation, Amazon was also nominated as a Member, but could not participate in the proceedings of the Committee. Shri Sumeet Hemkar, Chartered Accountant, BMR & Associates LLP represented Amazon, and participated in one meeting of the Committee, and provided his inputs, which were taken into account by the Committee.
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