AN expert group on taxation of e-commerce has said that India should not rush to make unilateral changes to e-commerce taxation under the current rules.

The country should work with the international community on this issue, and not risk jeopardising increased efficiencies and economic benefits offered by e-commerce. India should participate in international dialogue on e-commerce taxation, the group said in its report presented to the Central Board of Direct Taxes.

An international consensus is the key to evolving a lucid tax policy on e-commerce. International tax harmonisation was `extremely' important for positioning India in the lead of the global e-commerce market.

"It is not in India's best interest to take an adverse stand to the reasonably well-accepted principles. It may cause problems of mismatch of tax credits and non-availability of tax credit in the home jurisdictions of Indian and foreign companies conducting business globally," the group said.

Further many jurisdictions might not respect the proposed withholding tax as creditable income-tax, as it would not be based on net income. To avoid double taxation, foreign suppliers would either avoid doing business with India or increase the supply cost to India to offset the additional tax burden resulting from India's adoption of such a "base erosion approach". Similarly, the Indian companies' cost of doing business globally would also increase, seriously hampering India's growth, the group observed.

The group also felt that the Government should formulate a policy, which would not lead to an increase in costs for doing business within India. Given India's competitive advantage at the moment in e-commerce, the Government needs to carefully formulate a policy that is clear and transparent and which is consistent with the international norm of characterisation of revenues.

``Failure to do the above may force foreign companies and entrepreneurs to re-align their businesses if there should be increased costs due to taxation,'' the group observed.

"Creating a trust-based environment is better than creating a draconian legislation, since it will encourage multinationals to continue outsourcing work to India," the group felt.

The group felt that the Government should honour the principle of neutrality as laid down by the OECD (Organisation for Economic Cooperation and Development) and endorsed by the HPC (the high-powered committee constituted by the Government in December 1999 on e-commerce transactions) in its characterisation of income from e-commerce transactions.

The 14-member eCom tax expert Group comprises academicians and professionals - - Mr Duncan Bentley, Dean School of Law, Bond University, Australia, Prof Hubert Hamaekers, Chairman, IBFD, Netherlands and Mr Nishith M. Desai, Founder, Nishith Desai Associates. Industry representatives included Mr Bill Simple, Senior Director, Tax and Tax Affairs, Microsoft Corporation, and Mr Kiran Karnik, President, Nasscom.

Mr Desai formed the group to provide a global perspective on e-commerce taxation to the Government.

The group's objectives included providing a feedback on the HPC report to the Government, and to examine whether the interpretation of Indian law was correct.

The group also examined whether the interpretation of tax treaties was in line with the international principles of treaty interpretation.

India would play an important role in the development e-commerce, technology, e-business, IT outsourcing and call centres. Imposition of entry barriers such as improper taxation on e-commerce might ultimately harm developing countries like India, the group said.

While agreeing to some of the recommendation HPC, the group did not agree with the ``apparent macro-economic assumption'' that e-commerce would cause `significant' tax base erosion for India. On the contrary, it can be expected that India and other developing countries would be significant beneficiaries of e-commerce business efficiencies, the group felt.

According to a Goldman Sachs study, the number of Indian Internet users is expected to grow from 0.5 million in 1998 to nine million in 2003, a CAGR (compounded annual growth rate) of 76 per cent, the fastest in Asia. Nasscom, in its survey, expected e-commerce to grow from $93.75 million in 1999-2000 to $8,350 million by 2003-04.