Taxation of E-Commerce by Vimarsh at Lexcliq

While taxation is fairly common, the taxation of e-commerce activities is of recent origin. There are certain issues arising in taxation of e- commerce due to its unique features. For example, taxation of e-commerce can be difficult as the borderless nature of the transactions can create tax liabilities in different countries. This chapter focuses on tax related issues concerning e- commerce.



Before entering into the complexity of taxation of e- commerce entities, we must understand the basis of taxation. Tax is a compulsory payment made to the government of a country by its individuals or legal entities. Article 366(28) in the Constitution of India defines “taxation” in the following manner:

(28) “taxation” includes the imposition of any tax or impost, whether general or local or special, and “tax” shall be construed accordingly.

It has been stated in the Constitution[1] that no tax shall be levied or collected except by the authority of law. In India, taxes are levied by the Central Government and the State Governments.



Taxation can be distinguished on the basis of direct taxation and indirect taxation.


Direct taxation

Income tax is a direct tax applicable to businesses. In India, the governing law for taxing income is the Income Tax Act, 1961. As per the Income Tax Act, 1961, tax is levied based on income accruing or arising out of India. Income tax includes income accruing or arising, whether directly or indirectly, from any business connection, property, asset or source of income in India; interest, royalties and fees for technical services paid to a non-resident; and capital gains earned from transfer of assets situated in India.

There are two main types of direct taxation: source based and residence based. In source-based taxation, tax is levied by the country which is the geographical source of income. The concept of PE has been introduced to apply the principle of source-based taxation. In residence-based taxation, tax is levied on the basis of residency of the individual or entity.


What is PE

There is no liability to pay tax by an enterprise situated in one country to another contracting country unless the enterprise has a PE in the other country and generates income from it. The OECD Convention has defined PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on. For a PE, the fixed place of business must be located in a certain territorial area. The use of the fixed place of business must last for a certain period of time to constitute a PE.

Article 5(4)(e) of the OECD Convention provides that the term “permanent establishment” shall be deemed not to include the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.

Therefore, to constitute a PE, the activities performed through the fixed place of business must be of a business character. The application of the concept of PE becomes difficult for e-commerce companies as territorial borders disappear during the conduct of e-commerce.


[1] The Constitution of India, Article 265

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