The spread of the digital economy brings about many benefits, for example in terms of growth, employment and well-being more generally. At the same time, it gives rise to a number of challenges for policymakers. 

These challenges extend well beyond domestic and international tax policy and touch upon areas such as international privacy law and data protection, as well as accounting and regulation.

1. The continual increase in the potential of digital technologies and the reduced need in many cases for extensive physical presence in order to carry on business in a jurisdiction, combined with the increasing role of network effects generated by customer interactions, raise questions as to whether rules that rely on physical presence continue to be appropriate. 
2. Cross-border trade in goods, services, and intangibles creates challenges for VAT collection, particularly where such products are acquired by private consumers from suppliers abroad.
3. The development of new business models raises questions regarding the characterisation of income. 
4. Increasing reliance on data collection and analysis and the growing importance of multi-sided business models raise questions about the valuation of data, nexus, and profit attribution, as well as characterization.

Following are the steps are taken in this direction-

1. BEPS report

• • The Task Force on Digital Economy at the OECD mentioned three measures
    1. an equalization levy
    2. withholding taxes 
    3. New nexus rule
  • The first two are taxes on the gross turnover whereas the new nexus rule was to modify the taxable nexus beyond the physical presence in a country.

2. Equalization levy

• • These would apply to a wide range of digital services. 
  • The potential ramifications of these taxes could be over-taxation or a pass-through of costs to consumers. Such measures can give market jurisdictions greater power to tax.

3. Economic presence

• • In 2018, India proposed its long term solution to the problem — test for significant economic presence. 
  • The amendment was based firmly on the understanding that if a digital platform reported sales from a country or had a significant number of users it should be considered as having a taxable presence in that jurisdiction. 

Consensus must be evaluated in light of the misalignment of economic interests between developing and developed countries. A good tax system must have the axes of certainty, simplicity, and neutrality. An alternative may be to switch to a simpler withholding tax architecture.