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Taxing E-Commerce-India to set precedent that can Boomerang. 
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We have all heard of the story of the "Goose That Laid the Golden Egg". Time has come to remind the Indian Government about this story as some of the steps that the Government is trying to initiate on the E-Commerce Taxation front is likely to destroy the foundation of the industry itself.

In its eternal search for new revenue sources to support its bulging expenses, the Government of India is exploring ways and means to find new ways of taxing the Citizens. In this hunt, the Cyber Citizens of India and the Netizens from the Cyber World have now become the targets.

Apart from the imposition of "Service Tax" (Disguised Turnover Tax on Internet Content  Companies) which has become effective from July 17 2001, the government is considering amending the Income Tax legislation to tax companies carrying out e-commerce in the country without having a physical presence in India. 

According to a report which recently appeared in Times of India, Central Board of Direct Taxes (CBDT) chairman A. Balasubramanian has  said that the definition of "Permanent Establishment" envisaged in Income Tax laws has to be changed as many of the foreign companies engaged in e-commerce may operate in India without having a physical presence here. 

The move has been prompted under the presumption that there is a a growing revenue stream being generated from the e-business sector, which are flowing out untaxed in the absence of adequate tax laws. 

The support for such presumption has been drawn from  the  NASSCOM-McKinsey report, which has stated that  India has the potential of earning revenue worth $10 billion by 2008 from e-business. It is also stated that E-commerce and Internet related software and services exports amounted to $1.2 billion in 2000-01, and is expected to go up to $3.0 billion by 2003-04. 

"With increase in e-commerce in the country, there is an urgent need to put in place adequate legislation so that companies operating in India without having physical presence could be brought under tax net," Balasubramanian is reported to have said. He is also reported to have viewed that under present legislation, CBDT can impose tax on only those companies which have a physical presence in the country. 

It has also been indicated that this view has come under consideration because of the recommendations of the Kanwarjit Singh Committee which had been constituted  to suggest necessary changes in the Income Tax Act so as to tax e-commerce companies. 

Apart from taxing e-commerce, the CBDT is also drawing up necessary norms for taxing income generated from international transactions. Balasubramanian has also  said that the final guidelines for transfer pricing norms involving international transaction would come out by the end of this month. 

It is necessary at this stage for the Government to think whether the premises under which they are trying to come to the conclusion that Taxing E-Commerce is good for the country is correct.

First of all Indian Companies earning through their business operations conducted through the Internet are already taxed under the Income Tax Act. Here E-Commerce becomes only another channel for the business. Even though there may be problems of  under-reporting of income and difficulty in identifying the consumer in the transaction, there is no problem in taxing the transactions. 

When a foreign company does E-Commerce with Indian Residents, the underlying  goods are subject to indirect taxation through Customs duty. Even though this tax is ultimately paid by the Indian importer, since this would impact the net cost of the goods to the buyer, the seller will have to absorb it if the product cannot support the price inclusive of the duty. 

The digital products that move on the Internet do not come under the Custom's net. However it is not difficult to impose a responsibility on an assessee to pay customs duty on downloaded software even though it is not desirable.

The move to change the definition of the "Permanent Establishment" which in effect may mean a legislation to the following effect.

"Any website which enters into any contract for sale of a service or product with a person resident in India is deemed to have finalized the transaction through an office situated in the Indian soil"..

If the Government attempts to give such a definition for "Permanent Residence", they will be actually redefining the concept of "Virtual Space". This would not end up in merely determining the taxation status. It will also be applicable to every other law to which a local office will be subject to.

It will also be contradicting the Information Technology Act Section 13 which determines the jurisdiction of a Contract by defining place of  origin of an "offer" or an "acceptance" stating  as under
 

Time and place of despatch and receipt of electronic record

(1) Save as otherwise agreed to between the originator and the addressee, the
dispatch of an electronic record occurs when it enters a computer resource
outside the control of the originator.
(2) Save as otherwise agreed between the originator and the addressee, the time of
  receipt of an electronic record shall be determined as follows, namely - 

(a)  if the addressee has designated a computer resource for the purpose of 
  receiving electronic records 

(i) receipt occurs at the time when the electronic record enters the 
designated computer resource; or
(ii)  if the electronic record is sent to a computer resource of the  addressee
that is not the designated computer resource, receipt occurs at  the time
when the electronic record is retrieved by the addressee;

(b)  if the addressee has not designated a computer resource along with
  specified timings, if any, receipt occurs when the electronic record enters
  the computer resource of the addressee.

 (3) Save as otherwise agreed between the originator and the addressee, an electronic  record is deemed to "be dispatched at the place where the originator has his place of business, and is deemed to be received at the place where the addressee has  his place of business.
(4) The provisions of sub-section (2) shall apply notwithstanding that the place where  the computer resource is located may be different from the place where the
electronic record is deemed to have been received under sub-section (3).
 (5) For the purposes of this section - 

(a)  if the originator or the addressee has more than one place of business, the
principal place of business shall be the place of business;
(b) if the originator or the addressee does not have a place of business, his
usual place of residence shall be deemed to be the place of business;
(c) "Usual Place of Residence", in relation to a body corporate, means the
place where it is registered.

Further if Indian Government thinks it is clever and tries to tax non resident companies doing E-Commerce with Indian residents, the other 100 + countries with whom Indian Citizens and Companies deal with will also impose similar taxation. In the current balance of trade position India may have to lose more than what it can gain from such a move.

The idea of re-defining "Permanent Residence" to include parts of "Cyber Space" is therefore ill-advised and needs to be dropped.

Naavi
July 31 2001

Related Articles:

The Issues behind E-Commerce Tax
Taxing Music Downloads
Taxing Internet Speech
Article in CNN.com



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