In an attempt to foster a cashless economy as a part of its larger ‘Digital India’ campaign, the use of e-commerce and digital services has been made almost indispensable by the Government through the recent demonetization policy. Given the various tax incentives introduced in the 2016 Union Budget in the startup space and the guidelines issued by the Department of Industrial Policy and Promotion on FDI in e-commerce, coupled with stabilisation in valuations of homegrown e-commerce portals, the year 2016 has witnessed a steady momentum towards digitisation. These factors have cumulatively made e-commerce one of the fastest growing sectors in the Indian economy today, thereby fueling the need for tax certainty on certain crucial issues.
Over the years, foreign investors have increasingly faced tax hurdles in India in relation to permanent establishment and issues relating to the characterization of royalties where the offshore players in online marketplaces have an Indian arm. Similar challenges plague the cloud computing and similar software driven spheres. An item on the 2017 budget wish list would certainly be clarity in this regard. While certain tax sops in the form of non-taxability of excess premium on share subscription and tax holiday in the initial operational years have already been granted to start-ups, in order to make such tax concessions truly effective, start-ups should also be granted exemption from ‘Minimum Alternate Tax’.
This 2017 Budget also offers significant opportunities to usher in indirect tax related changes which will align with the GST. It is likely that the current service tax rate of 15%, which applies to most of the e-commerce services, may be hiked to match the proposed rate structure recommended by GST Council. The intention to shift the current tax regime to consumption-based taxation is evident from the recent revamping of service tax provisions for online services which is in line with the proposed GST framework. The scope of online services has been broadened, also cross border services are now under the service tax ambit. Tax incentives for the e-commerce sector in the form of lower rate of service tax, exemption or concession for equipment used by this sector and simplified compliance will surely help bolster the cashless economy initiative of the Government.
However, while industry expectations are riding high, given that the digital economy is increasingly becoming the economy itself, which has radically revolutionized global MNE value chains, ring-fencing such transactions from the Government’s taxability net would only tantamount to wishful thinking. The equalization levies as introduced by the Finance Act, 2016 has already set in motion India’s commitment to implementation of Action 1 of the OECD’s BEPS initiative by taxing certain ‘specified services’ such as online advertisements. It will be interesting to see how the Government seeks to further protect its tax base in the rapidly growing e-commerce sector.
*Expert contributions by Ritu Shaktawat (Principal Associate), Prajakta Menezes (Principal Associate) and Ishani Kundu (Associate), Khaitan & Co.