What are the major challenges faced by governments while making tax provisions for digital economy? Discuss the rationale and role of equalisation levy towards this.

The digitization of economy poses new challenges for taxation provisions. As the digital economy is becoming the economy itself, segregation of digital economy from rest of the economy for the purpose of tax will not be a viable proposition.
The major challenges regarding taxation in case of digital economy are :
As the digitization of economy is increasing new business models are evolving which poses a challenge in characterizing the nature of the payment. Also now establishing a tax jurisdiction is an issue, similarly the location of the transaction makes the issue more complicated so it is difficult to identify the taxpayer.
Rationale and role of equalization levy
In order to resolve these issues related to taxation on digital transaction Organisation for Economic Cooperation and Development’s (OECD’s) proposed equalization levy as a part of Action 1 of base erosion and profit shifting(BEPS). This will prevent companies to shift profits to tax havens.
A foreign E-commerce company will be liable to pay 6% equalization levy on the income from Indian soil through business to business services. Companies such Google,  Amazon, Facebook will come under the ambit of equalization levy.
The rationale behind such tax is that global online businesses who earn considerable income from India should pay some tax in India. This will act as an incentive for companies to have the permanent base in India so that they are taxed only on their net income made here.
Since the e commerce market is expected to grow at rapid pace in India, such levy on tech companies will ensure good revenue for the government which can be spent on key sectors like health, education etc.

Topics: GS-III: Indian Economy Issues Relating to Planning