Page 249 - Kaleidoscope Academic Conference Proceedings 2024

Innovation and Digital Transformation for a Sustainable World

6. DIFFERENTIAL TREATMENT OF The standard for deciding the question of taxation was
DEVELOPING COUNTRIES IN sought to be clarified by the Technical Advisory Group, in
INTERNATIONAL TAXATION the form of a non-exhaustive list in 2001, the key
characteristics and salient features of the list are as follows:
The UN system of international governance through policy
envisages differential approach in respect of the developing 1. the customer is in physical possession of the
countries and developed countries. There is nuanced property;
variation between the UN system as well as the OECD and 2. the customer controls the property;
EU mechanism which can be summarized as follows: 3. the customer has a significant economic or
possessory interest in the property;
The UN system creates a duality of obligation between the 4. the provider does not bear any risk of substantially
resident country and the source country of the particular ICT diminished receipts or substantially increased
solution. Thus, the UN system preserves the right of taxation expenditures if there is non-performance under the
of the source country on the royalties of the ICT solutions contract;
and gives a broader interpretational ambit to the definition of 5. the provider does not use the property concurrently
“royalty” to the source country. The standard established to provide significant services to entities unrelated
under this framework leads to a scenario wherein the source to the service recipient;
country from where the ICT solution is originated is entitled 6. the total payment does not substantially exceed the
to tax any payments as classifiable as royalties. rental value of the computer equipment for the
contract period. [6]
The year 2020 in August marked a significant milestone as
the United Nations Committee of Experts on International Thus, the 2002 Report guided that the monetary payments
Cooperation in Tax Matters requested the views regarding for hardware must be classified as “services income” i.e.,
the UN Model, Article 12B which provides for the ‘Income would be liable to the payment of “service tax” rather than
from Automated Digital Services’. This Article provided for the payment of “rental or licensing fee”.
a scenario wherein the source country would have the option
to negotiate a gross-based tax at a rate with the developing Additionally, the ICT solutions wherein the end user decides
country by apportioning 30% of the company’s net income and chooses from a standard menu of services are referred to
from automated digital services to the developing countries as “mass market” services. They do not provide a customized
where the revenues from those sales arise in the first place. service to the B2BN or B2C transaction, rather the ICT
According to the aforementioned Article the ICT solutions solution provider merely provides an unspecified technology
would be covered within its ambit thereby increasing the for the purpose of load balancing alone. The aforementioned
additional taxation rights for the developing countries where 2002 report provides that such an activity would always be
the final end users of these ICT solutions are located. classifiable as a “business service” as it would involve a high
level of control and regulation by the ICT solution provider.
7. TAXATION OF ICT HARDWARE : ISSUES However, according to the report, the part of such transaction
AND CONCERNS OF LEVY UNDER FCM involving the payment for the usage of the ICS equipment
AND RCM MECHANISM would be covered under the ambit of “royalty” and would be
taxable at that instance.
After the analysis of the UN Model described above, we
would be amiss to not discuss the OECD model of payments The classification of the nature of goods and services draws
which has been derived in respect of the following: “for the reference from the Customs Tariff Act, 1975. This leads to a
use of, or the right to use, industrial, commercial or scientific distortion or the wrongful levy of the GST and customs duty
equipment”. These activities were initially completely on the supply of the ICT solutions which overlooks the exact
classifiable as “royalties” thereby ensuing an effective and correct characterisation of the digital supplies. The exact
efficient mechanism for exclusive resident-based taxation. standard of RCM which is proposed for the collection and
However, in 1992, after constant opposition by various disbursement of the revenue to the governments is based on
member countries of the OECD, they allowed for a way of the principle of registration and self-assessment declaration
source taxation of the royalties. This was enabled through the which is indeed effective with the large scale huge MNC’s
deletion of the terminology “ICS equipment”, thus, ensuring but is not effective with the small-scale local suppliers who
that all the income and monetary gain generated from such still rely on the FCM basis of taxation and availment of ITC.
transactions would be classifiable solely as “business A notification providing clarification for the exact nature and
profits”. imposition of levy under the GST Act, 2017 would be crucial
to resolve the dichotomy of FCM and RCM taxation.
While the UN model highlighted above allowed for a source- Following the clarification in respect of the levy under the
based taxation along with the taxation of business profits, FCM and/or RCM basis, the availment of ITC would be
both the OECD and UN model were remiss of describing the logically decipherable for the ICT solutions as per law.
exact nature and definition of “ICS equipment” inasmuch as
the term is not described in their own domestic laws such as
the developing countries like India.

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