DIGITAL COLONIALISM AND FISCAL SOVEREIGNTY: AN ANALYSIS OF INDIA’S TAXATION RESPONSE TO MULTINATIONAL TECHNOLOGY ENTERPRISES

ABSTRACT

Digital transformation has undermined conventional tax systems, enabling multinational tech giants to evade taxation while extracting substantial profits from market jurisdictions. India’s digital economy, valued at $1 trillion by 2025, experiences significant revenue leakage from companies like Google and Amazon operating without physical presence through profit-shifting strategies. This research analyzes India’s response to core taxation challenges including income classification difficulties, establishment criteria ambiguities, and profit allocation complexities. India’s innovative three-stage taxation strategy encompasses the 2016 Equalization Levy (6% on digital advertising), 2018 Significant Economic Presence framework, and 2020 E-commerce Operations Levy (2% on online transactions). These measures combat digital colonialism—technological dependency and economic exploitation by global tech monopolies—while asserting India’s tax sovereignty and promoting equitable digital economy governance.

INTRODUCTION

The internet is now a genuinely global marketplace, gradually replacing more conventional forms of trade. With the Fourth Industrial Revolution just around the corner, it is clear that innovation and digital technology will rule the future. We, as members of the digital ecosystem, produce enormous volumes of data that are essential to the digital economy. Data access is necessary for e-commerce services, whether they are digital products (like software and music), digital services (like cloud storage and Big Data analytics), or a supplement to e-commerce delivery manufacturing and packaging^[1].

The conventional relationship between economic activity and fiscal jurisdiction, which was established under the League of Nations’ tax principles in the 1920s, has been profoundly disrupted by the digital revolution, which has led to an unprecedented crisis in international taxes.^[2] Since multinational tech companies use complex avoidance strategies to keep their effective tax rates below 15% while earning billions of dollars from users in developing nations, the idea of “digital colonialism” has become a crucial analytical framework for comprehending current trends in economic exploitation.^[3]

With a high rate of mobile internet penetration and the second-largest market for e-commerce, India is one of the world’s fastest-growing digital economies, with an estimated 644 million users in 2021 alone (State of India’s Digital Economy Report,2023). There have been steady expansion of a variety of digital activities in India, including online education, digital payments, and e-commerce transactions. According to the SIDE Report (2023), India holds the second-largest share of UPI digital payments globally. India’s digital economy is expanding at a rapid pace and is predicted to reach $1 trillion USD by 2025. Establishing a connection between the subject of the tax and the nation where it is levied is the fundamental tenet of taxes^[4].

India’s growing digital economy has highlighted the critical need for effective digital taxation systems. A fundamental challenge exists because digital companies often operate without physical presence in market countries, instead relying on overseas servers and local user data, making them difficult to tax under traditional frameworks. Multinational digital enterprises primarily based in developed nations generate substantial revenues in developing countries while avoiding taxation through profit shifting to low-tax jurisdictions. This results in significant revenue losses for developing economies that serve as key markets for these digital services.^[5]

Multiple countries have introduced unilateral digital taxation measures to address these gaps. India implemented an equalization levy, while other nations like the UK, Australia, Hungary, Italy, and Israel have adopted similar digital service taxes (DSTs). These measures emerged because conventional taxation systems designed for traditional businesses prove inadequate for the digital economy. While these unilateral measures help capture digital revenues, they create complications for international tax treaties and trade agreements. The equalization levy and similar DSTs function as a “double-edged sword” – solving immediate revenue concerns but potentially creating conflicts with existing international tax frameworks^[6].

DIGITAL COLONIALISM: A MODERN FORM OF CONTROL

Digital colonialism represents a contemporary version of traditional colonial practices, where a handful of global technology giants, primarily from developed nations, exercise control over developing countries’ digital infrastructure, data, and technological ecosystems. This mirrors historical colonialism’s concentration of power among dominant nations at the expense of others^[7].

Mechanisms of Digital Control

Digital dominance manifests through several key channels:

1. Infrastructure Dependencies: Developing nations increasingly depend on foreign cloud services from companies like Amazon Web Services, Google Cloud, and Microsoft Azure for essential data storage and processing capabilities, creating technological dependencies on external providers.
2. Platform Monopolization: Global social media and digital platforms such as Facebook, Google, and Twitter control information flow and communication channels in developing countries, shaping how populations access and consume information.
3. Communication Networks: Foreign corporations often build and maintain critical telecommunications infrastructure in developing nations, including mobile networks and undersea internet cables, giving them control over essential connectivity.
4. Economic Implications: Digital colonialism ensures that economic benefits from data and digital services flow primarily to foreign corporations rather than supporting local economies, creating a modern form of resource extraction that enriches dominant nations while limiting the technological and economic development of dependent countries^[8].

THE DIGITAL TAXATION AND ITS ECOSYSTEM FRAMEWORK

Digital taxation represents a critical component of e-government initiatives due to taxation’s universal reach across all demographic groups. Citizens expect high-quality digital tax services comparable to the e-commerce and mobile applications they use daily. While digitalization promises benefits like enhanced financial monitoring, reduced corruption, improved governance, and lower inequality, these advantages cannot be assumed. Digital taxation operates within a complex environment encompassing policies, strategies, processes, information, technologies, applications, and diverse stakeholders. This ecosystem recognizes that technology cannot exist in isolation but must be embedded within broader cultural, political, spatial, and economic contexts^[9].

Effective digital taxation requires understanding stakeholder roles, motivations, and behaviours; considering local contexts and processes; ensuring service availability and affordability; and evaluating expected costs and benefits. Success depends on effective engagement between tax authorities and their stakeholders, including international institutions like the IMF, World Bank, OECD, and UN. The ecosystem approach acknowledges that digital taxation’s impact extends beyond revenue collection to influence taxpayer behaviour, business operations, inequality, poverty, and fiscal policy, making stakeholder engagement crucial for sustainable implementation.^[10]

GLOBAL DIGITAL TAXATION: SOVEREIGNTY, JUSTICE, AND INTERNATIONAL COORDINATION

Digital multinational enterprises like Facebook, Google, and Amazon generate substantial revenues in market countries, particularly developing economies, through e-commerce, online advertising, and cloud computing. However, these companies remained outside taxation frameworks until 2016, exploiting international tax rules to shift profits to low-tax jurisdictions, resulting in minimal or no taxation in market countries^[11].

The OECD (Organization for Economic Cooperation and Development) comprises 38 nations focused on promoting economic growth and trade. The OECD first tackled digital taxation in 1999 through the Ottawa global conference on electronic commerce, establishing a taxation framework for electronic commerce in 2001. The OECD’s Task Force on Digital Economy identified BEPS (Base Erosion and Profit Shifting )  in 2013 as a tax planning strategy where multinational enterprises use deductible payments like royalties and interest to reduce tax burdens. Companies relocate high-tax elements such as patents, servers, and intellectual properties to low-tax jurisdictions while keeping low-tax elements like labour in resident countries through intra-group transactions, resulting in negligible total tax liability^[12].

The Sovereignty Challenge and The OECD-G20 Solution

This revenue loss represents more than financial damage—it threatens national sovereignty and democratic governance. Countries lose their fiscal self-determination, which is the fundamental ability to set budget priorities and redistribution policies according to their citizens’ values and needs. Without adequate tax revenue, governments cannot fulfil their social contracts or pursue justice as defined by their populations^[13].

Recognizing the complexity of digital taxation challenges, the OECD and G20 nations developed a comprehensive response through an inclusive framework involving 135 countries. This initiative introduced 15 action plans targeting Base Erosion and Profit Shifting (BEPS) issues, covering digital taxation, tax treaty abuse, and multilateral instruments^[14].

Three Strategic Approaches

The OECD-G20 Action Plan 1 proposed three key alternatives for taxing digital multinational enterprises:

1. New Taxation Nexus: Replace the traditional permanent establishment requirement with criteria based on user numbers, revenue thresholds, and contract volumes
2. Withholding Tax: Impose taxes on a percentage of gross revenue from digital entities
3. Equalization Levy: Tax foreign digital companies operating domestically to ensure fair competition with local businesses^[15]

DIGITAL ECONOMY TAXATION CHALLENGES UNDER INDIAN LAW

The taxation of digital transactions presents significant challenges under Indian tax legislation, primarily due to the borderless nature of digital business models and their reliance on intangible assets. Three core issues complicate the regulatory framework.

Three Primary Challenges

1.  Income Characterization Issues

Section 9, Income Tax Act 1961^[16] defines three categories of income for non-residents earning in India:

• Business income (40% tax rate – only if permanent establishment exists)
• Royalties (10% tax rate – regardless of permanent establishment)
• Technical service fees (10% tax rate – regardless of permanent establishment)^[17]

Digital businesses create ambiguity in determining whether revenues constitute business income or technical service fees, and whether subscription revenues are royalties or business income.

Judicial Interpretations:

Case 1: Ebay InternationalAG vs. Deputy Director of Income Tax^[18];

• Issue: Whether marketplace platform fees constitute technical service fees
• Ruling: Platform fees are not administrative service fees since the company merely provides a connecting platform for buyers and sellers

Case 2: In Re: Dun and Bradstreet Espana^[19];

• Issue: Whether database access constitutes royalty payment
• Ruling: Rights to access publicly compiled reports do not result in royalty payment

Case 3: CIT vs. Wipro Limited^[20];

• Court: Karnataka High Court
• Issue: Classification of database access payments
• Ruling: Database access payments should be treated as royalty since such transfers are equivalent to copyright usage rights

2. Permanent Establishment (PE) Determination

Digital businesses can strategically select operational jurisdictions using intangible assets (patents, algorithms) to minimize tax liability, often choosing locations with favourable tax regimes^[21].

Operational Issues:

• Digital platforms (Netflix, Amazon Prime) operate through offshore servers
• No physical presence requirement in customer jurisdictions
• Limited extraterritorial jurisdiction of Indian tax laws^[22]

Case: Uber India Services Limited v. JCIT^[23];

• Issue: PE determination and tax liability
• Company’s Argument: Uber India only provides support services and acts as collection/remittance agent, with actual operations conducted by Uber B.V. (Netherlands)
• Significance: Demonstrates jurisdictional arbitrage for tax optimization^[24]

3. Profit Attribution to Permanent Establishment

Legal Framework:

• OECD Model Convention Article 7^[25]: Establishes framework for profit attribution
• Rule 10, Income Tax Rules 1962: Provides methodology for profit attribution based on India-specific turnover

Implementation Challenges:

• Difficulty determining server-performed functions without physical personnel
• Complex risk assessment for digital operations
• Ambiguity in functional analysis for automated systems^[26]

Supreme Court Precedent: DIT v. Morgan Stanley & Co.^[27]

• Court: Supreme Court of India
• Ruling: Profit attribution must be based on transfer pricing principles
• Significance: Establishes mandatory framework for profit attribution calculations
• Current Practice: Despite this ruling, authorities frequently make unilateral profit attributions in various cases^[28]

INDIA’S DIGITAL ECONOMY TAXATION FRAMEWORK: KEY MEASURES AND INITIATIVES

The Government of India introduced the Equalization Levy through a Memorandum explaining the provisions of the Finance Bill 2016. The levy was designed to create a level playing field between domestic and foreign companies operating in India’s digital economy. The memorandum highlighted the need to restructure permanent establishment rules, which were originally framed for traditional brick-and-mortar businesses, to adapt them for the digital economy that operates without fixed physical locations^[29].

Phase 1: Equalization Levy 2016 – Online Advertising Services

To address the taxation challenges posed by digital multinational enterprises (MNEs) without physical presence in India, the government proposed a new tax called the Equalization Levy. The Finance Bill 2016 was passed by both houses of Parliament and became an act.

Key Provisions

• Assessment: 6% of the consideration received or receivable by non-resident MNEs
• Scope: Applied to specified services provided to Indian residents
• Financial Responsibility: The levy must be paid by the Indian recipient
• Threshold: One lakh rupees
• Application: Limited to business-to-business transactions
• Coverage: Initially applied only to online advertisements

The act also established procedures for payment, penalties, income tax deduction, and grievance mechanisms relating to the equalization levy^[30].

Phase 2: Significant Economic Presence (SEP) Concept (2018)

Following the implementation of the equalisation levy in 2016, India became one of the few economies to incorporate the notion of SEP of foreign firms into domestic legislation. The Finance Act, 2018, expanded the definition of a business connection in India by including Explanation 2A to Section 9(1)(i), which states that a non-resident with a SEP in India also counts as a business connection. Effect on April 1st, 2019^[31].

Phase 3: E-commerce Operations Levy – (2020)

The Union government took a significant step by introducing an equalization levy on e-commerce operations in 2020 through amendments to the Finance Act. This expansion moved beyond the original focus on online advertisements to encompass broader e-commerce activities. Part VI amendments to the Finance Act 2016 inserted Section 165A to include a levy on the e-commerce supply of goods and services.

Key Parameters

• Tax Rate: 2% on total revenue generated from Indian users^
• Threshold: 2 crore rupees
• Scope: All e-commerce transactions between India and foreign entities
• Aim: Foreign e-commerce operators without permanent establishment in India^[32]

CONCLUSION

India’s digital taxation system pioneers effective solutions for capturing revenues from multinational digital corporations through systematic three-phase reforms. The country joins leading nations like the UK and Australia in implementing digital service taxes, successfully generating revenue while levelling competition between local and foreign enterprises. Despite achievements, persistent legal ambiguities in income classification and profit attribution necessitate ongoing regulatory improvements. The framework effectively counters digital colonialism by preventing economic exploitation and preserving national sovereignty in the digital era. India’s model offers crucial lessons for developing countries, proving unilateral taxation measures can bridge gaps while global multilateral agreements develop. Long-term success requires sustained stakeholder collaboration, international coordination via OECD-G20 mechanisms, and adaptive responses to technological evolution, with effectiveness measured through revenue generation, inequality reduction, and fair distribution of digital economy benefits.

REFERENCES

[1] Pallavi Arora and Sukanya Thapliyal, “Digital Colonialism and the World Trade Organization” (Twailor, November 20, 2019) <https://twailr.com/digital-colonialism-and-the-world-trade-organization/ > accessed 9 July 2025

[2] Reuven S. Avi-Yonah, “International Tax Law as International Law “ (2004) <https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1552&context=articles> accessed 9 July 2025

[3] Tax Justice Network, “Litany of failure: the OECD’s stewardship of international taxation”(May 2024)  <https://taxjustice.net/wp-content/uploads/2024/05/oecd_failures_2024.pdf > accessed 9 July 2025

[4] Arun Pau l& N. Ramalingam, “OECD-G20 framework and Indian digital taxation: A study on equalization levy in India” (2023, VOL. 4, NO.3. pp 36-54. ) < https://www.gift.res.in/wp-content/uploads/2024/06/OECD-G20_Framework_and_Indian_Digital_Taxation_Arun_Paul_N__Ramalingam.pdf > accessed 9 July 2025

[5] Ibid

[6] Ibid

[7] Wayan Vota, “4 Ways to Stop Digital Colonialism in International Development” ( ICT Works, September 17, 2024) < https://www.ictworks.org/stop-digital-colonialism-international-development/ > accessed 9 July 2025

[8] Ibid

[9] Edidiong Bassey, Emer Mulligan, et al. , “A conceptual framework for digital tax administration – A systematic review” (October 2022,) < https://www.sciencedirect.com/science/article/pii/S0740624X22000909#bfn0010 > accessed 9 July 2025

[10] Ibid

[11] Arun Pau l& N. Ramalingam, “OECD-G20 framework and Indian digital taxation: A study on equalization levy in India” (2023, VOL. 4, NO.3. pp 36-54. ) < https://www.gift.res.in/wp-content/uploads/2024/06/OECD-G20_Framework_and_Indian_Digital_Taxation_Arun_Paul_N__Ramalingam.pdf > accessed 9 July 2025

[12] Ibid

[13] Laurens van Apeldoorn, “ BEPS, tax sovereignty and global justice, Critical Review of International Social and Political Philosophy” ( Taylor & Francis ,19 Aug 2016) < Full article: BEPS, tax sovereignty and global justice > accessed 10 July 2025

[14] Arun Pau l& N. Ramalingam, “OECD-G20 framework and Indian digital taxation: A study on equalization levy in India” (2023, VOL. 4, NO.3. pp 36-54. ) < https://www.gift.res.in/wp-content/uploads/2024/06/OECD-G20_Framework_and_Indian_Digital_Taxation_Arun_Paul_N__Ramalingam.pdf > accessed 9 July 2025

[15] Ibid

[16] Income Tax Act 1961, §9

[17] Ibid

[18] Ebay InternationalAG vs. Deputy Director of Income Tax, MANU/IU/1563/2013.

[19] In Re: Dun and Bradstreet Espana, MANU/AR/0036/2004

[20] CIT vs. Wipro Limited, MANU/KA/1799/2011.

[21] Sukriti Mathur, “TAXATION IN DIGITAL ECONOMY” (Manupatra, Nov 16, 2022), https://articles.manupatra.com/article-details/TAXATION-IN-DIGITAL-ECONOMY> accessed 10 July 2025

[22] Ibid

[23] Uber India Services Limited v. JCIT, MANU/IU/0891/2018

[24] Ibid

[25] Organisation for Economic Co-operation and Development, Model Tax Convention on Income and on Capital: Condensed Version 2017, Article 7 (Business Profits), OECD Publishing, Paris (2017) <https://www.oecd.org/en/topics/tax-treaties.html >

[26] Sukriti Mathur, “TAXATION IN DIGITAL ECONOMY” (Manupatra, Nov 16, 2022), https://articles.manupatra.com/article-details/TAXATION-IN-DIGITAL-ECONOMY> accessed 10 July 2025

[27] DIT v. Morgan Stanley & Co; AIRONLINE 2007 SC 338

[28] Ibid

[29] Arun Pau l& N. Ramalingam, “OECD-G20 framework and Indian digital taxation: A study on equalization levy in India” (2023, VOL. 4, NO.3. pp 36-54. ) < https://www.gift.res.in/wp-content/uploads/2024/06/OECD-G20_Framework_and_Indian_Digital_Taxation_Arun_Paul_N__Ramalingam.pdf > accessed 9 July 2025

[30] Ibid

[31] Sukriti Mathur, “TAXATION IN DIGITAL ECONOMY” (Manupatra, Nov 16, 2022), https://articles.manupatra.com/article-details/TAXATION-IN-DIGITAL-ECONOMY> accessed 11 July 2025

[32] Arun Pau l& N. Ramalingam, “OECD-G20 framework and Indian digital taxation: A study on equalization levy in India” (2023, VOL. 4, NO.3. pp 36-54. ) < https://www.gift.res.in/wp-content/uploads/2024/06/OECD-G20_Framework_and_Indian_Digital_Taxation_Arun_Paul_N__Ramalingam.pdf > accessed 9 July