Judicial Limits And Fiscal Innovation: Analysing Digital Taxation In India Through “Equalisation
Judicial Limits And Fiscal Innovation: Analysing Digital Taxation In India Through “Equalisation Levy” As A Taxing Regime With The Help Of The Case “Engineering Analysis Centre Of Excellence Pvt Ltd V. Commissioner Of Income Tax & Another”
Dharshini Sankar Ganesh, B.B.A., LL.B. (Hons), Chettinad School of Law
ABSTRACT
Before the introduction of modern methods to tax the digital economy, international taxation was based on traditional methods such as “Permanent Establishment” and “Source-based Rules of taxation”. These rules focused on physical presence, factories, offices and physical trade. Over the passing of time, digitalization of economy and emergence of E-commerce has been rapidly increasing by 10% every year1, causing a threat to the government as it affects tax collection and revenue generation. Huge enterprises like Google and Facebook earned revenue from market jurisdiction without having any physical presence such as office and employees to satisfy the criteria to fit in the classic rule of “Permanent Establishment”. This led to tax gap, base erosion and profit shifting. India lost its revenue, and the profits generated from India were shifted to low tax jurisdiction. Source rule of taxation was not effectively effectuated due to DTAAs (Double Taxation Avoidance Agreements). OECD formally addressed the issue by introducing 15 Action Plans, out of which the Action Plan came up with three major tools to tax the digital economy; SEP (Significant Economic Presence) for challenges faced regarding physical presence, With-holding of taxes for challenges faced regarding nexus, Equalisation Levy for challenges faced regarding characterization of income.
India adopted all of the above mechanisms, out which this case study will be focusing on the role of equalisation levy as a taxing regime. Equalisation levy was introduced in India, since it is a country with huge user market and large digital consumption. India, like any other developing country could not afford to wait until a uniform, mutually agreed, global tax consensus to be formed to tax the digital economy due to the increased income generation by MNEs. It was officially brought in as a taxing statute under the Section 165, Finance Act 2016 – 2% levy on online advertising and Section 165A, Finance Act 2020 – 6% levy on e-commerce supply of goods and services.
