From retailers to advertisers, media to business and financial services, the presence of e-commerce is being felt in almost every aspect of today’s business.
With the advent of multiple e-com ventures, the law makers are finding it extremely difficult to adapt their existing framework to meet the requirements of evolving business models.
Digital businesses largely involve online collation and storage of data from various customer groups through e-forms, sharing experiences and feedbacks. Such data can be either processed for its own use or transferred to another business. In such a case, the collection of data, earning of revenue and conducting of business could be in different jurisdictions and taxing the income derived from such activities could create collision in the taxing rights of various jurisdictions under the current framework.
Characterise online transactions
Another major area of concern is the characterisation of an online transaction. There has been an array of new products and services and new means of delivery for them with the advent of e-commerce. Especially in the field of cloud computing, with provision of information, data, platform and software as services, there has been increased ambiguity on whether the transaction would be taxed as “Fee for technical services” or as “Royalty” or would be covered under neither. For example, where a business/ end-customer downloads a software and updates it on payment basis, it could be construed as royalty, even if it is actually sale of goods in electronic form. In a recent Advance ruling (In the case of Skillsoft Ireland Limited (AAR no.985 of 2010), payment made for procuring educational content in electronic form has been treated as payment towards copyrighted content and characterised as “Royalty”. With the distinction of copyright and copyrighted article still under litigation, sale of electronic products can also been seen as a potential area of contention. This issue gains more interest and complexity where a particular transaction has varied characterisation in different jurisdictions.
Separation of business functions by legal entities setup in different jurisdictions can leave one or all the transactions untaxed. Payment of charges to overseas group company for procuring advertisement slots even though the servers are located abroad was termed as business income and not taxed in India as the overseas group company did not have any business presence in India (In the case of Yahoo India (P) Ltd v DCIT [2011] 11 taxmann.com 431 (Mum)).
Peculiarity of devices
When an overseas company which maintains India specific e-commerce websites, earned revenues from its group companies in India based on sales concluded, it was not considered as taxable in India as the characterisation did not meet the criteria for any stream of income that is taxable in India (eBay international AG v DDIT [2013] 40 taxmann.com 20 (Mumbai - Trib.). Further, it was held that when the overseas company enters into an agreement with Indian group companies for giving inputs on market penetration and advertising strategy, the Indian group companies are not considered as their agents.
In an e-commerce world, while the business is undertaken in a virtual platform, one cannot forget the technical equipment (such as servers, routers, transmission devices, etc) that facilitates this virtual platform. The peculiarity of such devices is their remote operation capability. Since it need not be physically present in the jurisdiction of the provider or receiver of service, it gives rise to challenges in allocation of taxing rights amongst the jurisdictions involved. The Delhi Tribunal (In the case of Galileo International Inc [2009] 180 TAXMAN 357 (DELHI)) had observed that supply of Computerised Reservation System to Indian customers will trigger permanent establishment (‘PE’) exposure to the overseas entity. Further, in case where such devices operate without human intervention, an additional issue is whether it can be taxed even as technical services.
Calling for reform
Based on current tax treaty provisions, it is tough to determine existence of a PE in jurisdiction based on business presence of an organisation in a particular jurisdiction through websites. With more and more businesses being carried out remotely and the linkage between businesses with its stakeholders becoming thinner by day, it becomes difficult to establish the nexus between the jurisdictions of the organisation with its market jurisdiction. While Indian tax authorities have expressed reservation on the view expressed by the Organisation for Economic Co-operation and Development (‘OECD’) in its commentary, on website creating a PE, resolving such dichotomy could bring more clarity. This said, clarity as to how revenue has to be allocated to each jurisdiction also gains relevance as we move along.
With direct taxes, indirect taxes also calls for reform. VAT being a state subject in India, e-commerce businesses must interpret multiple state laws to strategize its business models. For instance, Karnataka tax authorities had slapped notice on hundreds of suppliers to Amazon to stop storing their goods in Amazon’s warehouse or register Amazon’s warehouse as their additional place of business. It’s only a matter of time when other e-tailers face similar issues. Further, on this basis the direct tax authorities could also regard such warehouses as a deemed place of business for foreign sellers – OECD is infact considering similar proposal.
While in e-commerce business it has become a norm to make huge spend on their business promotions which also brings us to the question of tenability to claim such spends as a tax deductible expenditure – as these spends create enduring benefits by increasing customer base over a long term. E-commerce businesses are also dynamically changing its revenue models to increase its user base and this attracts more complexity for tax reforms.
The global scenario is not very different from India - invariably even the dominant economies face similar issues in bringing E-commerce transactions under their tax radar.
The deeper one dwells into the subject, the more it brings out the imbalance in the rate of growth of E-commerce business vis-a-vis the tax framework. It has been felt that the first step towards addressing such tax concerns is to understand the business model of e-commerce and also the gaps in the existing tax framework. Forums like the OECD included taxation of e-commerce as one its Base Erosion and Profit Shifting (‘BEPS’) action plans. The research document released by BEPS initiative on September, 2014 deals primarily with issues faced in cross-border e-commerce transaction, capturing the peculiarity of functioning of e-commerce businesses and broad level proposals that could be embedded in the prevalent tax system. The proposals include modifying tax treaties to prevent treaty abuse, amending definition of PE, introducing virtual PE concept, strengthening withholding tax mechanisms, considering possibility of imposing tax based on data usage and reforming VAT laws relating to digital supplies.
Seed growth
That said, as we stand here looking forward to faster strides in the e-commerce industry, the above concerns would not be exhaustive, but only be a stepping stone of brain storming. Like bringing in presumptive taxation for other sectors, similar tax code could be a wish list for stakeholders to e-commerce business in India to showcase stability in the tax regime. While, the recent exemption from applicability of Minimum Alternate Tax provisions on foreign companies that do not have a PE is a welcome tax reform, to foster end user satisfaction and increase market base in the e-Commerce space, exchequer needs to bring more such clarity and ease regulatory framework to seed growth of this booming sector.
With inputs from Nikhil J Varghese, manager, Tax and Regulatory Services, PwC India