1. Digital Economy: Equalisation Levy Customer Care No. 91-11-45562222 www.taxmann.com

2. In this era of technology intertwined lifestyle, e-commerce has become a way of life. E-commerce seemingly facilitates every other aspect of our lives at a click of a button, whether its procurement of daily household items or requisitioning of any particular service. Today, accessibility to the digital world is not a privilege but a necessity for most people, particularly in urban areas. Over the past few decades, the burgeoning development of the Information and communication technology ('ICT'), its accessibility and affordability has led to this digital revolution around the world. ICT has also provided opportunity to businesses to tap the world markets and bridge the requirement of physical presence across the globe. 2 Customer Care No. 91-11-45562222 www.taxmann.com

3. The model of doing business electronically has provided immense growth opportunities. Digital economy across the world is reflecting a growth rate of 10% 1 which is significantly higher than the growth numbers of the global economy as a whole. Research and studies around the world have indicated that investment in ICT positively affects the productivity and GDP growth of a country. Developed countries in terms of ICT development have the highest GDP levels, which indicates that implementation of ICT in a country improves its overall economic health. 1 Despite the significance of ICT in overall development of an economy, ICT quotient has remained low in India. Though, in past few years, India has witnessed some successful start-ups in this field, development of the concerned infrastructure is much needed to capitalise on the growth opportunities. Foremost India has to bridge the urban-rural hiatus in terms of the communication infrastructure. With the NDA government vision of Digital India, it is expected to embark a digital revolution in India and to achieve the desired growth rates. Albeit, this model of conducting business through the realms of cyberspace has led the enterprises in procurement and selling of goods and services in different jurisdictions without any physical presence in that country, the same has also led to severe tax challenges direct as well as indirect. The economic presence in a sovereign through the world of web has posed direct taxation concerns due to absence of physical presence in that specific jurisdiction. 3 Customer Care No. 91-11-45562222 www.taxmann.com

4. The development of the cyber economy has captured the attention of the taxman of the world economies to test their fundamental Permanent Establishment rules developed for old 'brick and mortar' economies, in the light of the tax challenges caused by the new digital business models. The digital market has revolutionized traditional ways of conducting business around the globe, while tax rules have been slow to adapt to this new business environment and could not come up with the possible solution. It is widely felt that MNEs have treaded the path of aggressive tax planning thriving upon the interaction of tax laws and treaty provisions between different sovereigns and have relatively paid low amounts of tax or no tax by artificially shifting profits away from the economy where they are earned, to a more favourable tax jurisdiction. This has led to a divide between the economic presence in a country vis-a-vis taxable presence in such jurisdiction. G20 2 members have expressed their concern with regard to artificial shifting of profits by the MNEs to the low or no tax jurisdictions and in response thereto announced a coordinated drive with Organisation for Economic Cooperation and Development ('OECD') to modernise the current framework of tax treaties and nationally set anti-tax avoidance laws. OECD at the request of G20 is leading the initiative of development of a strategy to address such profit shifting, through its Base Erosion and Profit Shifting project ('BEPS'). Since 2012, OECD is working hard to achieve the goal to curb the unwarranted tax practices by MNEs and has introduced 15 Action Plans in mid 2013 3 highlighting the necessary areas of concern, action points to address them and the expected outputs of those actions. 2 3 4 www.taxmann.com Customer Care No. 91-11-45562222

5. OECD in its BEPS report Action Plan 1 4 on addressing the tax challenges of the digital economy, has highlighted tax neutrality 5 as a major concern and suggested several options to tackle the direct tax challenges which inter-alia includes amendment in the Permanent Establishment rules, modifying the definition a PE to address artificial arrangements through certain "conclusion of contracts" arrangements, amendments in the OECD's transfer pricing guidelines and designing of rules for Controlled Foreign Corporations ("CFCS") Rule. Apart from the aforesaid the Task Force also considered certain other options inter-alia, a nexus test in the form of a significant economic presence requirement; a withholding tax on certain types of digital transactions on the payments made by the resident to the Non-Resident enterprises for the goods and services procured digitally; charging of an Equalisation Levy to impose equal treatment of foreign and domestic suppliers by taxing the foreign suppliers for their economic presence in that country, but the same were not recommended by OECD in its final report on tax challenges of the digital economy under Action Plan 1. 4 5 In the midst of this debate of challenges and the recommendations on taxation of the digital economy and majority of the world economies still considering the options recommended by OECD, India has taken a leap to address the challenges in terms of taxation of MNEs having a digital economic presence in India without any physical presence.Though, UK and Australia too have initiated steps to tap the concerns of BEPS by introducing "Diverted Profit Tax" and "Multinational Anti Avoidance Law" respectively. The Indian tax proposals announced wide Union Budget 2016-17, suggests introduction of a new Chapter VIII forming part of Finance Bill separate from the Income Tax Act, 1961 comprising 17 Sections, an Equalisation Levy of 6% on the amount of consideration for the digital advertising services provided by a non-resident not having a permanent establishment in India to a resident in India who carries business or profession or to a non-resident having a permanent establishment in India. 5

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