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• The tax is implemented through a low withholding tax; and
• Preferably the withholding tax is final without the option of tax on net
income being given to the taxpayer or the tax administration.
Theoretically, it would seem that the erosion of tax base in an e-commerce
situation, with the existing concept of PE, would be taken care of by accepting the
‘base erosion’ approach. However, a careful study of the trade data and the
ground realities is required to see whether a real life tax based on ‘base erosion
approach’ will actually ensure a more equitable sharing of revenues between
countries of residence and source. In a real life tax based on this approach it may
not be possible to tax all outflows eroding the tax base. Taxation of outflows,
which even in traditional commerce, carried on long before the emergence of
e-commerce, were not taxed, as no PE existed, would be difficult to justify or
implement. In India, for instance, oil or fertilizer imports are so sensitive for the
economy that it may be impossible to tax such goods. The tax may also be
perceived as a transaction tax and therefore resisted. Exports will get taxed
abroad thereby eroding the tax base within the country. The overall impact on the
tax base in the event of change is, therefore, not all that clear. Before considering
the ‘base erosion approach’ as a possible alternative to the PE concept, it is
necessary to study the trade data carefully to ascertain if, and to what extent, there
will be erosion or potential erosion, of tax base in India with growth of
e-commerce and to what extent the ‘base erosion approach’ takes care of the
problem. This Committee has neither time nor resources to undertake such a