This paper critically analyses the effort made by the European Community to preserve the functionality of the European system of VAT within the digital trade environment. On 7th May 2002 European, Council adopted a Directive and a Regulation to amend the existing VAT legislation, an action that EU believes would remove the serious competitive disadvantage EU companies suffers against its non-EU suppliers of digital services. By adoption of this Directive the taxation jurisdiction shifts from the location of sale to the location of the consumption of goods, thereby removing the EU' disadvantage and taxing all digitally delivered products at uniform rate. The VAT Directive made the EU the first significant tax jurisdiction in the world to develop and implement a simplified framework for consumption taxes on e-commerce. However, this unilateral approach of EU has come under severe criticism. The key to the success of this Directive is online identification of consumers. As of now technology will not allow the online seller to verify the location of a consumer or whether the consumer is VAT registered. The Directive assumes that this technology will become available. Against this back drop the paper re-emphasis the need to have increased international cooperation for administering consumption taxes.