The Indian High Powered Committee on ‘Electronic Commerce and Taxation’, constituted in 1999 to examine the taxation of electronic commerce, has issued a detailed 222 page summary of its findings.

The Committee agrees with the OECD’s position in that there is no case for exempting e-commerce from direct taxation, and states that the income of content providers, service providers and all other persons engaged in e-commerce should be subject to same taxation as traditional commerce.

The Committee recommends the continuation of residence based taxation, since in its view there is no real alternative to the concept of “place of effective management”, which should continue to be used. However, the Committee recognises that where in the case of a globally integrated enterprise, no unique solution is available through the concept of “place of effective management”, the solution could be “source based” taxation only.

As regards the concept of permanent establishment in double-taxation treaties, the Committee is of the view that applying the existing principles and rules to e-commerce does not ensure certainty of tax burden and maintenance of the existing equilibrium in sharing of tax revenues between countries of residence and source. The Committee is also firmly of the view that there is no possible liberal interpretation of the existing rules, which can take care of these issues, as suggested by some countries. The Committee, therefore, supports the view that the concept of permanent establishment should be abandoned and a serious attempt should be made within OECD or the UN to find an alternative to the concept of permanent establishment.

According to the Committee, the concept of permanent establishment evolved because in traditional commerce physical presence was required in the source country if any significant level of business was to be carried on. Absence of a permanent establishment implied only insignificant business activity, which could be overlooked for tax purposes. This concept lost relevance with the technological advance in communication and development of teleconferencing. With that and the development of the Internet in the 1990s, the correlation between the size of business and the extent of physical presence in the source country ceased to exist. In all transactions undertaken through the Internet, even where delivery is in the traditional manner, the tax base in the source country would be nominal.

Finally, as regards enforcement the Committee recommends the setting up of systems of disclosure by the enterprises, voluntary as well as when required, third party information requirements for intermediaries like ISPs and banks, monitoring and surveillance and improving taxpayer service.