DIGITAL ECONOMY & TAXATION

A digital economy refers to an economy that is based on digital computing technologies, although we increasingly perceive this as

Conducting business through markets based on the internet and the World Wide Web. The digital economy is also sometimes called the Internet Economy, New Economy, or Web Economy In a nutshell, it refers to an economy based on digital technologies.

The current tax rules (International as well as Domestic) were devised decades ago based on the functionality of the brick and

Mortar economy. However, with the advent of the digital economy, the present tax regime stands redundant. The profits of digital businesses have been increasing alarmingly, but there do not exist commensurate tax laws to tax such profits. Accordingly, it is need of the hour for all the countries to devise and revamp their tax laws, as the digital economy is ripe for taxation. Direct Tax in India is levied under the Income-tax Act, 1961 (‘the Act’). Taxation of non-residents is governed by section 5 read with section 9 of the Act and provisions of the Double Taxation Avoidance Agreement (‘DTAA’). DTAA treaties, business profits are attributed to a Permanent Establishment (‘PE’) as if it is a distinct and separate entity as per the provisions of Article 5 read with Article 7 of a DTAA. In order to address the tax concerns related to the digital economy, three specific issues need to be resolved: (a) Characterization of Income (b) PE existence and attribution of profit. (a) Characterization of income

There are considerable differences in the tax treatment of an income depending upon its characterization. The three primary categories under which a non-resident’s income can be classified are ‘Royalty’, ‘Fees for Technical Services’ (‘FTS’) and Business Income. The tax rate of each income differs depending upon its characterization. Therefore, it becomes imperative to tighten the tax net with respect to transactions involving technology and thereby does not escape any tax.

Mr. Rohith. R 

Assistant Professor and Head, Dept of Commerce, Al Shifa College of Arts and Science, Kizhattoor, Perinthalmanna