Taxation Law

[By Isha Janwa] The author is a student of O.P. Jindal Global University, Sonipat.   INTRODUCTION: In today’s interconnected world, the ‘digital economy’ has emerged as a powerhouse, the rise of which can be attributed to advancements in information and communication technology (ICT). Multinational Enterprises (MNEs) now conduct cross-border business seamlessly, without the need for physical presence in foreign territories. This paradigm shift allows digital corporations to establish connections with consumers and operate virtually, transcending geographical boundaries via internet.  However, this newfound flexibility in the digital landscape has sparked significant concerns in taxation. Traditional tax frameworks, designed for ‘brick-and-mortar’ economy, struggle to accommodate the borderless nature of the digital economy. The reliance on physical presence as a basis for taxation becomes increasingly inadequate in this dynamic environment.  Recognizing these challenges, the Organisation for Economic Co-operation and Development (OECD) introduced Base Erosion and Profit Shifting (BEPS) Action Plan 1. This initiative characterizes the digital economy as data-driven, reliant on intangibles, and complex in determining value creation jurisdiction due to minimal physical presence requirements.  OECD’s action plan identifies three key taxation challenges in the digital economy: the need for nexus, navigating data usage and value attribution, and characterizing payments for digital goods and services. To address these challenges, OECD proposes a two-pillar approach. Pillar one focuses on broader taxation issues, including profit allocation and nexus, while pillar two targets remaining BEPS concerns such as establishing a global minimum tax rate.  The action plan presents three solutions for digital taxation: establishing a nexus based on Significant Economic Presence (SEP), implementing withholding tax on digital transactions, and introducing an equalization levy. However, it has not recommended any specific measure, therefore, countries can adopt either of these measures.  One such measure, Significant Economic Presence, has been adopted by countries like India. This paper examines the importance of nexus in taxation and assesses the effectiveness of implementing Significant Economic Presence to address nexus challenges, with a focus on India’s tax framework.  NEXUS REQUIREMENT FOR DIGITAL TAXATION AND SPECIAL ECONOMIC PRESENCE:  In the intricate landscape of taxation, the principle of nexus plays a pivotal role. Essentially, nexus refers to the connection between an entity’s income and the jurisdiction seeking to tax it. However, in the realm of ‘digital economy’, this connection becomes notably elusive.  Digital companies, operating primarily in the virtual realm, often lack physical presence in the countries where their services are consumed. This absence of a tangible footprint makes it challenging for tax authorities to establish a direct link between the company’s income and the country, unless a permanent establishment exists.  The absence of a permanent establishment often leads to the taxation of digital companies’ profits in the jurisdiction of their incorporation. This loophole enables digital entities to strategically establish themselves in low-tax jurisdictions while profiting from a global customer base online.  Since the entity would be taxed in the place where it is incorporated, the countries try to have lower tax rates so that the profits are shifted but this competition puts the developing countries at a disadvantage because the corporate tax is one of the main sources of income for such countries. Therefore, one of the key objectives of BEPS project is to prevent ‘shifting of profits’ and ensure that companies pay taxes where their economic activities generate profits, irrespective of their physical presence.  However, the absence of a clear nexus between digital companies and the countries where they operate presents a substantial hurdle. It can be avoided by establishing a taxable presence in the jurisdictions where the entities are performing economic activities even without being physically present. The concept of Significant Economic Presence was brought forth to address this issue. It means that non-resident entities can be taxed in a jurisdiction if they engage in significant economic activities there, even without a permanent establishment. This ensures taxation of substantial economic value derived from the jurisdiction, regardless of physical presence. It is based on three factors. Firstly, the generation of revenue. Secondly, digital factors like IP. Thirdly, user-based factors.  India adopted this measure of Significant Economic Presence (SEP) in 2018 but the applicability got deferred to 2021-22. India introduced the concept of Significant Economic Presence (SEP) in 2018, but its implementation was delayed until 2021-22. According to Section 9 of the Income Tax Act, 1961, any income earned by non-residents from a business connection in India is deemed to have accrued or arisen in India, making it taxable in the country. Explanation 2 to section 9(1)(i) defines “business connection” and now includes a new way to tax foreign companies’ profits known as “significant economic presence.” This means that if a non-resident has a significant economic presence in India, it will be considered as having a business connection in India, leading to the income being taxed in India, regardless of having a physical presence or providing services in India, or where the agreement for the transactions is made. This occurs if either of two specific conditions are met. One is revenue-based SEP, which considers taxation based on generated income, while the other is user-based SEP, which considers taxable presence on the basis of a substantial user base or customer activity within the jurisdiction. The former addresses revenue, while the latter addresses user activity.. Central Board of Direct Tax has issued notification defining thresholds for establishing SEP. The threshold for Revenue is 20 million Indian Rupees. The threshold for users is 300,000 users.   In the traditional framework of taxation laws, the ‘source taxation’ was not established sufficiently for digital economy. However, the concept of Significant Economic Presence has enabled ‘source countries’ to tax the income which is generated from their jurisdictions.   EFFECTIVENESS OF SIGNIFICANT ECONOMIC PRESENCE MEASURE:  The provision of SEP seeks to bring non-residents within the ambit of domestic laws of taxation in India. Since this measure is adopted only in domestic law of India, it can’t override the tax treaty provisions of ‘Double Tax Avoidance Agreement’ (hereinafter ‘DTAA’)  which are primarily based on the concept of permanent establishment. Without revisions to these

[By Chirag Motwani] The author is a student of Hidayatullah National Law University, Raipur.   Introduction:  To enhance the corporate governance regime in India, the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted. The primary purpose of the act was to look upon the financially distressing entities and their revival as a foremost objective. IBC is considered an evolving piece of legislation owing to the numerous development that occurred since its enactment. One of the peculiar features of IBC is its relation with other legislations. One such relation is the relation of IBC with the Income Tax Act.    Since the enactment of the Insolvency and Bankruptcy Code (IBC), the conundrum surrounding the validity of reassessment notices under the Income Tax Act for a period preceding the approval of a resolution plan under the IBC reflects the intricate interplay between two distinct legal frameworks. The IBC aims to deal with the financially distressed entities in a way to revive them as the foremost objective.The IBC, designed to address corporate insolvency, aims to provide a streamlined mechanism for the revival and resolution of financially distressed entities. However, the Income Tax Act, which governs the taxation aspects, poses challenges when it comes to reconciling the timelines of insolvency proceedings and the tax assessment cycle. The question arises as to whether reassessment notices issued by tax authorities for a period predating the approval of the resolution plan are valid, considering that the financial landscape of the entity undergoes substantial changes during the insolvency process. The issue needs clarity for effective legal functioning as well as harmonizing both the legal frameworks. This piece aims to highlight the judicial trends in this regard and aims to provide a suitable position of law concerning the dilemma underlined above.  Judicial Trends:  The question concerning the validity of such notices for a period prior to the approval of resolution plan has been dealt in, Murli Industries Limited vs. Assistant Commissioner of Income Tax & ors. The Bombay High Court herein took a view that, the revenue cannot issue notices against the corporate debtor for unpaid taxes after the adjudicating authority has approved the resolution plan. In the case, after the approval of the resolution plan took place in 2019 by NCLT and was upheld by NCLAT in 2020. The Revenue issued Reassessment Notices to the company for the assessment year 2014-15. Bombay HC considered the notices issued by the revenue invalid as the period pertaining to the notice was covered under the resolution plan. Similarly, in The Sirpur Paper Mills Limited and Ors. Vs. Union of India and Ors. the Telangana High Court took a view of setting aside the notices issued by the Income Tax Department for a period dated prior to the resolution plan. The court in the judgment in paragraph 70 mentioned, “From the tone and tenor of the impugned notices what is evident is that respondents are seeking to pass assessment order under Section 143(3) of the Act since the case of petitioner No. 1 was selected for limited scrutiny under CASS. However, the period of the assessment order would be a period covered by the resolution plan.” Again in, Rishi Ganga Power Corporation Ltd. Vs. Assistant Commissioner of Income Tax the Delhi High Court recently took a view that the notices issued by the Income Tax Department under Section 142(1) as invalid as the period for which the notices were issued were predating the period of resolution plan that was approved by the adjudicating authority. However a shift in the position of precedential values was observed in the approach of Madras High Court in, Dishnet Wireless Ltd. v. Assistant Commissioner of Income Tax wherein, the income-tax authorities had initiated reassessment proceedings for AY 2011-12 and AY 2012-13, post admission of the CIRP application. The High Court passed interim orders in the matter, allowing the income-tax authorities to proceed with the reassessment.   This came as an anomaly to the prevailing practice of invalidating the notices for a period prior to the approval of the resolution plan. The rationale behind the allowance of reassessment notices was that the IBC although having an overriding effect cannot impinge upon the rights of any other law being in force at the time and thus IBC cannot dilute the rights of the Income Tax authorities to reassess the assesse for any unpaid tax amount. This judgment is particularly conflicting with the generally accepted position of law and also dampens the spirit of IBC.   Analysis:     It is important to understand the objectives of the IBC in order to analyze the anomaly in Dishnet. The primary objective of the IBC is to revitalize the financially distressed entities.One of the objectives of the code is to revive the corporate debtor. To ensure this it becomes necessary that after the approval of the resolution plan the corporate debtor is not faced by a situation wherein a payment has to be done to clear dues predating the resolution plan. The Supreme Court in, the Essar Steel Case emphasized upon the surprise claims that the corporate debtor should not face after the approval of the resolution plan. The court provided, “ A successful resolution applicant cannot suddenly be faced with “undecided claims” after the resolution plan submitted by him has been accepted as this would amount to hydra head popping up which would throw into uncertainty amounts payable by the prospective resolution applicant who would successfully take over the business of the corporate debtor.”  Furthermore, the over-riding effect of IBC helps in this regard. The over-riding effect has been upheld and provides for the supremacy of the code in case of conflict with other prevailing laws. The Madras High Court did not consider the line of reasoning as provided above and instead passed orders hampering the spirit of IBC. Furthermore the Apex Court in the Ghanshyam Case inter-alia dealt with the “mischief” conducted by authorities also comprising the tax authorities that continued with litigation even after the approval of the resolution plan and provided

[By Vaisiya Ramya B.] The author is a student of Tamil Nadu National Law University (TNNLU). Introduction: In the pre-GST regime, the government to promote the investment and manufacturing sector rolled out various area-based excise and Value Added Tax (VAT) exemption schemes through the power conferred under section 5A (1) of the Central Excise Act, 1944, and the state-specific acts. However, with the implementation of GST, the Central Government withdrew these area-based exemptions, causing concern for taxpayers who had heavily invested in those regions based on the government’s promises. This resulted in an outcry from the trade sector, advocating for the continuation of these exemptions under the GST regime. Consequently, a budgetary scheme was introduced by the government but its effectiveness seemed cumbersome,  amidst existing unresolved judicial trends on the applicability of the equitable doctrines of promissory estoppel and legitimate expectation in cases of withdrawal of tax exemption benefits, which ensures consistency in the public authority decision-making, and fairness in tax administration. Thus, this article examines the rules of interpretation of tax exemption provisions and the judicial trend concerning the applicability of the equitable doctrines to the withdrawal of tax exemption benefits pre- and post-GST regimes. Rules of Interpretation and Construction of Tax Exemptions: Tax statutes are generally interpreted strictly based on their literal and direct grammatical meaning, without considering their consequences. In such cases, equity and presumptions cannot be relied upon, and the legislative intent cannot be read into the law. However, it is important to distinguish between the interpretation of a charging provision and an exemption clause or notification. The issue of ambiguity in the interpretation of tax exemption clauses or notifications, which can lead to two possible outcomes, has sparked a debate as to whether a strict or liberal interpretation should be adopted in such cases. This matter has been the subject of contention in several cases, leading to the establishment of new interpretative standards. In 1997, the Supreme court in  Sun Export Corporation v. Collector of Customs[i] dealt with the question of interpreting the term “animal feed” to include a blend of vitamin AD-3 animal feed supplements for the purpose of claiming a tax exemption benefit. The Court here held that in matters of taxation, when there are two possible interpretations, the one favourable to the assessee should be preferred, reflecting a leaning towards the liberal interpretation. In 2012 asimilar, stance was adopted by the court in the case of Commr. of Customs (Import) v. Konkan Synthetic Fibres. However, in contrast, in 2018 the constitutional bench of the Supreme Court in the Commr. of Customs (Import) v. Dilip Kumar  overturned the ratio established in the Sun Export case and other judgments that adopted a similar stand. And held that when there is ambiguity in an exemption notification, it is subject to strict interpretation and it must be interpreted in favour of the revenue rather than the assesee. Also in 2022,  the court in the State of Gujarat v. Arcelor Mittal Nippon Steel (India) Ltd, determined that the exemption notifications or clauses should be strictly interpreted, only resorting to purposive interpretation in cases where a statutory provision is unclear or leads to irrational outcomes. Following that interestingly in 2021, the apex court revisited the issue of interpretation of tax exemption in the case of  Govt. of Kerala v. Mother Superior Adoration Convent but this time it agreed with earlier rulings on a strict interpretation of the tax statute and introduced a new line of precedent regarding beneficial exemption, establishing that even in tax exemptions, a liberal interpretation may be sought to provide an incentive for “fostering economic growth or other beneficial purposes.” Accordingly, it can be comprehended that the general rule states that the ambiguous provisions imposing liability should be strictly interpreted in favour of the assessee, while exemption clauses should be construed in favour of the revenue. However, this rule is not rigid and has undergone changes over time, particularly in cases involving economic growth or beneficial purposes, where a more liberal interpretation of exemption provisions has been adopted. This is done for the purpose of advancing the objective of the exemption clause and promote the ease of doing business. Incentive provisions deserve such treatment as the purpose of encouraging industrial activity will otherwise get frustrated and also would affect the domestic and foreign investment on local businesses. Judicial Trend in applicability of Equitable doctrines in Withdrawal of Tax exemptions: Pre- and Post-GST Regime: Position Pre-GST Regime: In MRF Ltd. Kottayam v. Assistant Commissioner Sales Tax & Ors. the court while examining the question of whether processing raw rubber with chemicals qualifies as “manufacture” to claim tax exemption citing Section 38A(c) of the Central Excise Act, 1944 noted that tax exemption notifications apply prospectively unless there are overriding public interests, thereby the state is not permitted to make retrospective changes that impair rights that have already accrued. Thus, ruling in favour of the assessee concluded that the tax exemption notification is not revocable. Similarly, in Bannari Amman Sugars Ltd. vs. Commercial Tax Officer & Ors, the court observed that if a decision maker denies a person’s legitimate expectation by demonstrating some superseding public interest, then the rejection of that expectation is justified. Further in State of Bihar v. Kalyanpur Cement Ltd. and Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P., the court reaffirmed the principle that indefinite and unexplained justifications and a simple assertion of change of policy would not be enough to absolve the Government of its responsibility. However, in contrast, in Shrijee Sales Corp. v. Union of India,  the court observed that the government is competent to revoke a promise even if there is no evident public interest involved, provided no one is placed in an adverse situation that cannot be resolved. Hence, it can be inferred from the majority of the judicial decisions that the establishment of overriding public interest forms the pre-requisite for withdrawal of tax-exemption benefits prior to be appointed date. This thereby introduces an exception to the established rule of promissory estoppel and doctrine of legitimate expectation.

[By Jaipreet Singh Alag] The author is a student of Rajiv Gandhi National University of Law, Punjab.   Introduction With the advent of the Delhi High Court’s judgement in the case of Bhavik S. Thakkar v. Union of India, a debate has started between the power of the customs authority to issue detention certificates and the right of the custodians to claim demurrage charges from the importers of goods. In the said case, there was a mis-declaration of goods on the part of the petitioner leading to their confiscation by the Directorate of Revenue Intelligence (DRI). Once the case was settled a detention certificate was issued by the Customs Authority to the Container Corporation of India (hereinafter, referred to as ‘CONCOR’) i.e., the custodian of imported goods. However, the same was not heeded by the CONCOR, leading to a dispute between it and the Petitioner. Detention Certificates are issued by the customs authority to waive demurrage charges which are levied by the custodian of imported goods on the importers, primarily in cases of illegal detention of goods by the customs authority. They derive their legal standing from Regulation 6(1)(l) of the Handling of Cargo in Customs Areas Regulations (HCCAR, 2009). The aforementioned judgement has placed primary reliance on Section 63 of the Customs Act, 1962 while not giving much consideration to the detention certificate issued under HCCAR, 2009. However, the Finance Act, 2016 has omitted Section 63 from the Customs Act which has enhanced the status of the HCCAR. The article analyses the conflict that has emerged between the HCCAR and the relevant statutes in the area of customs because of the omission of Section 63 from the Customs Act. Right to Demurrage of Custodians Demurrage is a charge that is levied by a custodian of imported goods under Section 45 of the Customs Act in return for the services provided by it, such as warehousing. In certain cases, the imported products are detained by the customs authority for investigation which can be a lengthy process. In such a case the investigation takes place while the services of the custodians are under continuous use. Upon the conclusion of the investigation, the custodians demand the charges (referred to as demurrage) for the usage of their services from the importers. In cases of illegal detention of goods by the customs authority, the chances of conflict between the custodians and the importers increase exponentially. In such cases, the judiciary has usually taken a stand in the interest of the custodians. In the case of International Airports Authority of India v. Grand Slam International, the Supreme Court upheld the Right to Demurrage of the custodian even when the goods were illegally detained. However, the judiciary’s stance is not entirely one-sided. For instance, in the case of M/s Shipping Corporation of India v. CL Jain Woolen Mills, the Supreme Court transferred the liability of paying the demurrage charges to the customs authority instead of the importer of goods. Nevertheless, in the said case, the decision stood in favour of the custodians. Therefore, it can be suitably said that judicial precedents continue to recognise the right to demurrage of custodians. Impact of the Omission of Section 63 from the Customs Act The conflict between detention certificates and the right to demurrage fees of custodians appeared to be settled because of the established precedents. However, the omission of Section 63 from the Customs Act has led to this conflict coming to the fore again. It is pertinent to note that Regulation 6(1)(l) of the HCCAR, 2009 begins with a ‘subject to’ clause which makes the regulation prone to the provisions of other statutes in the country. In this regard, the detention certificates did not possess much power since Section 63 of the Customs Act upheld the right to demurrage of the custodians countering the regulation. The same was affirmed in the case of Bhavik S. Thakkar v. Union of India wherein, the Delhi High Court gave primary consideration to the aforementioned provision of the Customs Act while upholding the decision of the custodian i.e., CONCOR to not release the goods until the demurrage charges for the usage of its warehousing are paid. The intention behind the omission of Section 63 of the Customs Act The omission of Section 63 from the Customs Act has been consistently used as a means to justify the violation of the right to demurrage of custodians. However, while dealing with the instant omission it is important to consider the intention behind the omission of the aforementioned provision. Thus, reference must be made to the explanatory notes of the Finance Bill, 2016. The explanatory note to clause 126 of the Finance Bill explicitly mentions the intention behind the omission of Section 63 to be “privatization of services, and free market determination of rates, including those by facilities in the public sector.” The instant explanation to clause 126 of the Bill cannot be interpreted in a manner that curtails the right to demurrage of the custodians since privatisation is the primary aim of the instant omission. Therefore, any adverse effect on the demurrage rights of the custodians would be contrary to the omission of Section 63. Section 170 of the Indian Contract Act and its interplay with the issue of Demurrage Rights The Finance Act, 2016 has provided for the omission of Section 63 from the Customs Act, it has become important that alternative statutes are used to protect the demurrage rights of custodians. In most cases, the relationship between a custodian and an importer is foundationally based on a contract of bailment. In such contracts of bailment, the importer is considered the bailor while the custodian is the bailee of the goods imported. This view has been upheld by the Supreme Court in the case of M/s Shipping Corporation of India v. C.L. Jain Woolen Mills wherein, it was held that such a relationship requires the application of Section 170 of the Indian Contract Act, 1872. The said provision of the Contract

[By Trilok Choudhary & Arya Tiwari] The authors are students of Gujarat National Law University.   INTRODUCTION Digitization has transformed the business landscape, blurring the boundaries between physical and virtual realms. As businesses navigate this digital frontier, so must tax policies evolve to ensure a fair and equitable taxation framework that captures value in an increasingly intangible economy. TAXATION UNDER OECD MODEL CONVENTION The challenge of taxation initially arose from how to tax foreign corporations. While India could tax domestic entities, complexities emerged with foreign companies operating internationally. The core issue was the risk of double taxation. Each nation holds the right to tax its residents, but this posed questions about where foreign enterprises’ profits should be taxed. This led to a conflict between the company’s incorporation state (resident state) and the state where profits were generated (source state). The OECD Model Convention’s Article 7 introduced the “permanent establishment” concept, a fixed business location in the source country. Foreign companies were primarily taxed by their resident state, but if they had a permanent establishment in the source state, that state could also tax them. Article 7(2) clarified permissible taxation, treating permanent establishments as separate entities. For example, let’s take a hypothetical situation involving a company, say Rico, and its establishment in different states were seen as distinct entities for tax purposes. Transactions between them involved theoretical compensations, like managerial services or licensing fees, determined through a process called benchmarking. The source state could then tax Rico based on these hypothetical payments. Despite attempts, the issue of double taxation persisted, as both source and resident states had tax authority. Article 23 resolved this with the Exemption Method (taxing remaining income after source state tax) and the Credit Method (taxing entire income but crediting back the source state tax). Article 10 extended source state authority to tax passive incomes, imposing conditions on dividends. The foreign company must hold 25%+ shares in the permanent establishment for 365+ days and qualify as the “Beneficial owner” of dividends. This ensures funds are genuinely for its use, and merely as a conduit. Source states can tax dividends (up to 5%) and interest (up to 10%). The “Beneficial owner” concept prevents non-treaty states from exploiting reduced tax rates for entities in treaty states. How exactly do you tax digital entities that have only a digital presence within the market and no permanent establishment (The Digital Challenge)?  This is perhaps the biggest challenge in the arena of international taxation in recent time and in this regard on July 11, 2023, 138 members of the OECD/G20 Inclusive Framework on BEPS agreed upon an outcome statement to address taxation challenges stemming from the digital transformation of global economies. This need was heightened by Multinational Enterprises (MNEs) exploiting tax discrepancies to shift earnings to low or no-tax areas, weakening the tax base of many nations. This exploitation, coupled with the ability of businesses to operate in areas without a tangible presence, challenged traditional tax norms based on “permanent establishments.” Consequently, the framework aims to promote fairness, tackle intricate tax avoidance tactics, establish a standardized global tax landscape, avoid double taxation, and amplify transparency. The solution comprises two main pillars. Pillar 1 focuses on Profit Allocation and Nexus, moving beyond the older notion limited to Permanent Establishment. It introduces taxation rights for nations with significant user/consumer bases, even if a business doesn’t have a tangible presence there. For MNEs surpassing a turnover of USD 20 Billion and a profitability above 10%, taxes are based on revenues from that specific jurisdiction. However, this might lead to additional tax levies. To counter this, the GloBE regulations mandate that MNEs contribute at least 15% tax on earnings from every jurisdiction.  These rules complement current corporate tax norms; if taxes on revenue in a jurisdiction meet the minimum tax requirement, no extra tax is levied. Furthermore, Pillar 2‘s 15% minimum tax levy addresses under-taxation by tax havens. For instance, if State S taxes a company at only 9%, the home state can impose an additional top up tax of 6%, guaranteeing the minimum tax threshold, addressing concerns related to patent boxes, thin-capitalization, and transfer pricing. INDIAN EQUILISATION LEVY India initially chose not to directly adopt the OECD BEPS recommendations. Instead, in 2016, it implemented its unique tax measure, known as the Equalization Levy, set at a 6% rate. This levy applied to specific services, primarily targeting online advertising services received by Indian resident businesses or non-residents with a permanent establishment in India, from non-resident service providers. This was referred to as Equalization Levy 1.0. In 2020, India further expanded the Equalization Levy’s scope through an amendment, introducing a new 2% levy on e-commerce supplies or services. This updated version is often referred to as Equalization Levy 2.0, it encompasses all e-commerce operators, regardless of their Indian residency status. An e-commerce operator, in this context, refers to a non-resident entity that owns, manages, or operates a digital platform facilitating online sales of goods or service provision. Under this framework, such operators are subject to a 2% charge on the total consideration received or expected. However, this levy does not apply to entities possessing a permanent establishment within India, provided the e-commerce activity is directly associated with that establishment. The following scenarios such as digital entities already subject to the existing 6% equalization levy, transactions with an annual consideration value under INR 2 crores are likewise excluded from this levy. However, the Equalization Levy was not without its shortcomings. The broadly phrased provisions in the levy introduce both interpretational and practical challenges. For instance, the levy stipulates that individuals providing services utilizing an Indian IP address can be subject to taxation. However, this raises a quandary when dealing with non-Indian residents using Indian IPs for transactions with service providers outside India. This ambiguity sparks concerns about the levy’s extrajudicial reach. Moreover, it’s unclear if the levy targets the total sales of goods or just the commission charges by e-commerce platforms. This distinction is significant, particularly for entities like

[By Tanya Verma] The author is a student of Dr. Ram Manohar Lohiya National Law University.   INTRODUCTION In the Budget 2022, the Finance Minister introduced a provision to impose income tax at a rate of 30% on profits obtained from the transfer of virtual digital assets (VDAs), although a clear provision still lacks, an attempt to shed clarity on VDAs and their exchange has been made. To that, this piece provides an in-depth analysis of the tax implications surrounding direct and indirect taxation, specifically focusing on the complexities involved in determining the taxable nature of winnings, including digital assets such as bitcoins and tokens, that are received as rewards from online games. Further, the article explores legal literature surrounding the skill-chance dichotomy inherent in online gaming and contributes to the existing discourse around technology driven transactions as rewards. VDAs UNDER INCOME TAX ACT Previously, income earned from cryptocurrencies was taxable based on the nature of the activity. Individuals involved in cryptocurrency investment were taxed under Income from Capital Gains or Income from Other Sources, as per IRS provisions. On the other hand, individuals engaged in cryptocurrency trading were taxed under Income from Business/Profession. However, this classification changed with the introduction of the Finance Bill, 2022.The author believes, considering the unique characteristics of online gaming in India and the necessity for specific regulations regarding taxation, the government has taken steps to address this, however a clear framework still lacks. In terms of income tax, if an individual sells bitcoins received as gaming rewards, the resulting gains would be taxable. The tax treatment of these gains can vary depending on the intent of the individual, whether they classify the gains as business income or capital gains. Previously, there was no dedicated provision for the taxation of online gaming. Instead, Section 194B of the Income Tax Act (ITA) was applied, which dealt with TDS deduction by person who is “responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees.” Additionally, Section 194BB covered TDS deduction for horse racing and wagering. Furthermore, Section 115BB of the Act imposed a 30% tax rate on winnings. Though these provisions existed, it failed to provide an exact framework involving technology driven transactions or a settled position of earnings from games, be it that of skill or of chance. The Finance Bill 2023 introduces two new sections under ITA to regulate winnings from online gaming: Section 115BBJ: This section states that net winnings from online games will be subject to a 30% tax rate, effective from April 1, 2023. Section 194BA: This section mandates the deduction of tax at source at a rate of 30% on winnings from online games, effective from July 1, 2023. Together, these provisions signify the government’s intent to establish a comprehensive framework for taxing and regulating winnings from online gaming. The introduction of specific tax rates and the requirement of tax deduction at source aim to facilitate better monitoring, compliance, and revenue generation in the evolving landscape of online gaming, primarily under direct taxation provisions. VDAs UNDER GOODS AND SERVICES TAX (GST) GST Act lays no specific definition for cryptocurrencies or digital assets, new provisions provide that VDAs cannot be classified as money or securities and are considered as goods for GST purposes. Additionally, the Central Board of Indirect Taxes and Customs (CBIC) has opined that cryptocurrencies are not treated as currency but rather as goods or services, which is important to note as currency is not taxable under the same, while goods and services are subject to taxation under different slabs. Crypto-related activities, including mining, exchange services, wallet services, payment processing, barter systems, and other transactions, require classification as either goods or services to determine the appropriate treatment. However, for determination of tax rates, there is no specific Harmonized System of Nomenclature (HSN) code for digital assets. However, HSN code 960899, which pertains to other miscellaneous articles, is often used with an applicable GST rate of 18%, the highest in that category. To understand how this is implemented, it is important to delve into the skill versus chance discourse. In a significant development last year, the Online Gaming Industry faced a major upheaval when the Department issued a Show Cause Notice to Gameskraft, demanding an extraordinary sum of Rs. 21,000 crores taxing as Goods at a rate of 28%, however, the Karnataka High Court delivered a landmark judgment addressing the concerns related to the key questions in the GST-related litigation for the Online Gaming Industry are: Skill-based or chance-based: Are the games considered skill-based or games of chance (betting/gambling)? Taxable amount: Should GST be levied on the full amount pooled by players or only on the platform fee charged by Online Gaming Platforms? Addressing the first prong, the Supreme Court established that competitions requiring a significant degree of skill are not considered gambling. If a game is primarily based on skill, even if it involves an element of chance, it is classified as a game of ‘mere skill.’ The Court relied on the Supreme Court’s judgment and determined that Dream11’s fantasy sports predominantly rely on users’ superior knowledge, judgment, and attention, making it a game of skill rather than chance. Similarly, the Bombay High Court analysed Dream11’s Fantasy Games and concluded that they do not involve betting or gambling since the outcome is not dependent on the real-world performance of any particular team on a given day. Rajasthan High Court reached a similar conclusion and dismissed a Public Interest Litigation, stating that the issue of treating the game ‘Dream11’ as involving betting or gambling has already been settled. As for the second limb, the target of taxation, in the context of GST, can vary depending on the specific circumstances and regulations of a particular jurisdiction. However, in general, both players and the platform can be subject to GST. Players may be liable to pay GST on

[By Reet Balmiki] The author is a student of NALSAR University of Law.   Introduction With the Union Budget 2023-24 being presented, the Finance Bill 2023 proposed key amendments to the provisions concerning the taxability of winnings from gambling under the Income Tax Act, 1961 and introduced separate provisions to govern online ‘games.’ This move proposed by the Union is in response to the increasing uncertainty in regulating online ‘games’ due to state-wise regulatory mechanisms. While certain states have imposed a blanket ban on all online games played for a stake, others have chosen to regulate the industry through a partial ban. Additionally, the imposition of a complete ban also results in the legislature blurring the distinction between games of skill and games of chance and, in effect diluting the judicial test of ‘preponderance of skill.’ Undeniably, the online gaming industry has cemented its place among the most prosperous sectors in the rapidly growing digital economy. Consequently, a consistent and transparent policy regulating the burgeoning industry while appreciating its contributions to the Indian economy is a pressing need. This article has three objectives: First, it sets out the evolution of the law related to gambling through courts and the legislature; Second, it discusses the controversy surrounding the legislative competence of the recent state laws/ordinances on the subject; Third, it traces the policy implications of the proposed amendments in the Finance Bill, 2023. Tracing the evolution of the meaning of ‘Gambling’ The debate over the gamut of ‘Gambling’ has dual significance, first, it lays down the foundation for the rational distinction between games of skill and chance which is the focal point of the debate over online gaming, and second, it defines the extent of regulatory jurisdiction of the state legislatures and lies at the heart of the recent controversy over the classification of online gaming. This section briefly traces the judicial interpretation of the term and the jurisprudence attached to it. The judicial foundation was laid down for the first time in the case of State of Bombay v. R.M.D. Chamarbaugwala, (“Chamarbaugwala”) where the Supreme Court deliberated upon the Bombay Price Competition Tax Act, and referred to the definition of ‘Price Competition’ under Section 2(2) and held that any game which does not substantially depend on the exercise of skill constitutes ‘gambling.’ This reasoning was applied explicitly as the test of preponderance in the K Satyanarayana case. Here, the Court categorized Rummy as mainly and preponderantly a game of skill with only a certain element of chance, thus distinguishing it from chance-based ‘gambling.’ This test was further concretized in the K.R. Lakshmanan case, where the Court was faced with determining whether horse riding is a ‘game of skill’ and consequently saved by the exemption clause in the Madras Gaming Act, 1930. Here, the Court substantiated the ‘preponderance of skill’ test from Chamarbaugwala and concluded that games based on a substantial degree of skill (including games of mere skill or predominant skill) shall not constitute ‘gambling.’ The judicial categorization into predominantly skill-based and purely chance-based games does not foresee the possibility of a purely skill-based game, as evident in MJ Sivani. This conceptual vacuum results from the judicial non-consideration of differentiation between the ‘chance’ factor in a game and the element of ‘accident.’ Contrary to this, the Public Gambling Act, 1867 and state legislations have categorized these games into: games based on ‘mere skill,’ games based on ‘mere chance,’ and mixed games of skill and chance. It is only the games of ‘mere skill,’ with the possibility of ‘accidents’ but no ‘chance’ factor, which are exempted from the prohibition under gambling laws. Therefore, while mixed games where skill is predominant are allowed as per the judicial test, many state legislatures have sought to ban these. One prominent example is the Explanation to Section 15 of the Telangana State Gaming (Amendment) Ordinance, 2017, which refuted the judicial interpretation of Rummy being a skill-based game because of the luck/chance factor. However, this position is inconsistent among the states and indicates a broader policy gap. Legislative Competence for regulating Online Gambling: prerogative of the States or Union? Moving forward, it becomes noteworthy that nothing in the Constitution prohibits the legislatures from overriding the judicial interpretation of ‘gambling’ through a clarificatory amendment, provided the legislative body has the requisite competence. In this light, the controversy surrounding the definition of ‘gambling’ further intensifies in the case of ‘online gambling’, which has increasingly become susceptible to state regulation. In the scheme of federalism, the legislative powers have been defined under Schedule 7, where Entry 34 of the State List gives states the legislative competence to make laws on ‘Betting and Gambling.’ However, with the Karnataka Police (Amendment) Bill, 2021, and the Tamil Nadu Gaming and Police Laws (Amendment) Act, 2021 banning online skill-based games, the challenges to the legislative competence of states over such gambling laws has been a prominent issue. Two aspects become relevant; first, whether Entry 34 needs to be read expansively to include ‘games of skill’ and second, whether a liberal construction of Entries under the State list permit such a ban. The Tamil Nadu Amendment was challenged in Junglee Games case, where the Petitioners contended the competence of the State Legislature to impose a blanket ban on all online games for stake, including ‘games of skill.’ The contention here lies at the crux of our discussion. Firstly, the State attempted to take an expansive view of ‘gambling’ and ‘betting’ under Entry 34 to include any game played for a stake. However, the rational distinction between games of skill and chance cannot be diluted to such an extent as it goes to the very root of competence. An over-expansive reading of the Entry would change the very meaning of the entry, thus being held impermissible. Secondly, the amendment to Section 11 to undo the exemption clause for games of ‘mere skill’ further diluted the preponderance test by imposing a blanket prohibition. Per R. M. D. Chamarbaugwala, ‘games of skill’ form a different class

[By Abhishek Bhatra] The author is a student of National Law University and Judicial Academy, Assam.   Introduction The treatment of Works Contract in the Pre-Goods and Service Tax (GST) era subjected the Service Provider to a variety of indirect taxes such as Service Tax, Value Added Tax (VAT), and Central Excise. However, if the Works Contract was awarded by the Government, a Government Authority, or a Local Authority, the Service Provider was given the liberty to claim exemption from the applicable Service Tax. With the implementation of the GST Regime, the erstwhile exemption under the Service Rate notification 25/2012 for Government Contractors has been done away with. Furthermore, liability towards GST for Works Contract is now imposed on the ‘Time of Supply’. This reform has opened up a pandora’s box for the various Service Providers who had been awarded a Works Contract by a Government body in the Pre-GST era but had executed the said work – either partly or wholly – in the GST regime, as to on whom the burden of the additional tax liability shall be imposed. This article explores this lacuna in light of the legislative actions undertaken and the judicial position established, whilst presenting comprehensive solutions to resolve this conundrum. The question of law involved The immediate impact of the GST regime has been the clubbing together of all the applicable different indirect taxes, and now Works Contracts are taxed under a single head – on the entire amount – at a uniform rate, which has been divided into three slabs, namely, @18%, @12%, and @5%, depending on the nature of the works executed. The liability to pay GST for Works Contract executed is determined on the basis of ‘Time of Supply’ –under Section 13 read with Section 31 of the CGST Act – which constitutes the date on which supply of the services is deemed to have been rendered. In case the invoice is raised within the prescribed period of 30 days, then the date on which invoice is issued by the Service Provider or the date on which he receives the payment – whichever is earlier – is deemed to be the ‘Time of Supply’. And if the invoice is not raised within 30 days, the date of completion of service would be deemed to be the ‘Time of Supply’. Another integral transposition has been the discontinuance of the distinction between the works contract awarded by a government body and the works contract awarded by a private entity with respect to the Service Tax exemption provided to the former. Consequently, after the GST regime came into effect, Government bodies were hit with a deluge of representations from the various under contract Service Providers regarding the extra financial burden imposed because, as per ‘Time of Supply’ they would be liable to pay taxes under the GST regime even though they had prepared and submitted their bids taking into consideration the erstwhile taxation rates. This gave rise to a pertinent question of law as to on whom the burden of such differential tax liability must be affixed, because standard works contracts stipulate that the bid price quoted shall be inclusive of any State or Central Taxes. Steps taken hitherto To overcome this impediment, the Central Public Works Department, the Ministry of Railways, and various State Governments, such as Kerala, Tamil Nadu, West Bengal, Andhra Pradesh, Bihar, Orissa, as well as various departments under the Karnataka and Chhattisgarh governments, took into consideration the plight of such Service Providers and consequently issued clarifications vide Government Orders, Gazette Notifications, Circulars, and Standards of Procedure. There was also Judicial Activism for the purpose of resolving this impediment. For instance, the Hon’ble High Court (HC) of Jharkhand, in the case of M/s Sri Sai Krishna Constructions v. State of Jharkhand and Others, had vide its order dated 16.03.2021 directed the State of Jharkhand to formulate guidelines on this issue, in compliance of which the State had accordingly issued requisite directives for dealing with this matter. These steps, although beneficial, nonetheless encountered a series of difficulties for their effective enforcement, negating the intent behind introducing them because many aggrieved Service Providers could not get the intended relief, due to inefficacious redressal by the State Departments, and thereby had to seek judicial intervention in the process. For instance, in the case of M/s D.A. Enterprises v. State of Chhattisgarh and Others, the State Government had refused to accept the request of the aggrieved Service Provider for refund of the additional tax burden – by failing to abide by its circular – upon which the Service Provider had to file the instant writ petition seeking the Hon’ble Chhattisgarh HC’s intervention for claiming relief. A similar situation was presented before the Hon’ble Madras HC in the matter of Subaya Constructions Company Limited v. Tamil Nadu Water Supply and Drainage Board and Others. wherein the treatment of additional tax burden was processed under the third method of calculation, whereas it was contended by the Service provider that it should have been under another method. The Hon’ble Court, after considering the submissions, ruled in favor of the Service Provider. At this juncture, there still exists a vast majority of states that have yet to adopt effective measures for the purpose of overcoming this impediment. In such states, the only mechanism for redressal available to the aggrieved Service Providers is the long and expensive route of litigation. Resolving the conundrum Since the erstwhile VAT was a state subject under the Seventh Schedule, it is integral that the remaining states implement the requisite clarifications or guidelines for dealing upon this aspect, and the existing states should revise their clarifications or guidelines, through appropriate policy decisions, for effective enforcement and redressal. Firstly, it must be ensured that a uniform guideline is issued that is applicable for the Works Contracts entered into by all the authorities and departments of a particular state prior to the commencement of the GST Regime. This is pertinent in view of the question