A high powered committee on Electronic Commerce and taxation was constituted
by the CBDT on December 16, 1999 under the chairmanship of Mr Kanwaljit
Singh. The Committee has published a draft report for which public response
has been sought. The last date for the same expires on October 30, 2001.
The objective of the Committee was to examine the projected growth of
E-Commerce business and whether it should be subject to tax etc. Some of
the observations made by the committee are as follows.
The Committee feels that no reliable data exists as to the estimate
of E-Commerce business either in India or elsewhere.
However, the committee feels that there has to be uniformity in the
taxation of traditional commerce and E-Commerce and to that extent there
is no case for exemption of E-Commerce from Direct Tax.
The Committee also recognizes that there is no issue regarding domestic
E-Commerce taxation except for the need to avoid evasion because of lack
of records. In respect of cross border E-Commerce however, there is a need
to examine the incidence of tax and a mechanism to levy and collect the
same.
Significantly, the Committee has come to the view that applying
the existing principles and rules to E-Commerce is impractical and the
concept of "PE" (permanent place of establishment) adopted by few countries
and backed by article 5 of the OECD model tax convention should be rejected.
The Committee feels that the "Base Erosion" approach in the form of
a low "Withholding tax" for any payment to a foreign enterprise with
the option of being offset by tax on net income by the receiver in his
country is a workable option. It has been recommended that CBDT should
examine this option and the implementation mechanism.
The approach of the Committee is pragmatic and deserves commendation.
CBDT should initiate necessary dialogue with the International community
to generate consensus on the approach and establish a suitable mechanism.
In the interim time, the status quo can continue. Presently the revenue
from E-Commerce has not reached the levels which would make the Taxation
authorities too concerned.
In implementing the recommendations however, the "Rate of Withholding
tax" should be as small as around 0.5 % since it is a turnover based
tax and there is no guarantee that there is a real profit in any transaction.
There should also be a base exemption upto say a tax of Rs 1 lakh so that
small entrepreneurs generating "Export Income" are not needlessly harassed
with the tax formalities.
Naavi
October 29, 2001.
Comments on the report may be sent latest by 30th Oct'2001 to :
The Under Secretary (Foreign Tax Division)
Ministry of Finance,
Department of Revenue,
Room No. 277-B, North Block,
New Delhi - 110 001
Full Copy of
the Draft is available here
