Cyber Speech..Is it Taxable?

Indian Tax administrators have thrown up a challenge to the International Community to redefine the legal status of "Cyber Speech". The affront has come in a rather inocuous looking provision under "Expansion of Coverage of Service Tax". In an administrative notification, the Ministry of Finance has announced that from July 16th of this year, any website which is collecting a fee for making its content available to the Netizes has to pay a service tax calculated at 5% of the amount so collected.

As a result of this provision, sites such as,, Capitalmarket .com, ,,,, and many other sites which have built in a revenue model for passing on value added content on a fee will now have to pay a service tax.

This development has to be seen from two distinct angles. First, from the feasibility and desirability of taxation of web Content and secondly the  legal implication  of such a tax on the nature of the virtual property called the "Content".

From the point of view of "Desirability" of taxing the web content, every economist knows that over the last one year, "Dot Com" economy has been in doldrums and every web publisher has been looking for alternative revenue streams. In India, profits earned out of Web activities is not exempt from tax in any manner and hence the entire income earned by an Indian Company is any way taxable.

What the "Service Tax" implies is that the tax is based on "Turnover" and not "Profit". Hence this 5% load would be a heavy burden on the E-Business.  Most of the dot coms are already in red and taxing them on turnover basis is a short sighted measure which will kill many more dotcoms before they can stabilize their operations.

In terms of administration, the responsibility for collecting and paying the tax lies on the website owner and hence the Tax administrator can selectively pick the offender for prosecution. For a majority of sites, complying with this law would be an undue burden on their skeletal administration. It would be better for such sites to revert to ad based revenue model that the fee based revenue model. If this promotes throwing open of the content free and provides a push to Web advertising, they would be the positive fall outs of this taxation move.

Even if the economic impact of the tax can be handled by the Service providers, the issue has an important legal dimension to it. It is popularly believed that interent is a medium of expression and web content is a form of speech. If listening to this speech by payment is subject to "Turnover Tax", then any "Seminar" with participation fee would also be subject to a similar levy. Alternatively, it can be argued that Internet Conent is not "Speech" but is a "Property" or a "Product" a audio cassette of a speech. If this view gains legal validity, the "Freedom of Internet Speech" may get affected, since the content would not be protected by the laws that protect free speech. This could set a dangerous precedent.

It must be recognized that the legal impact of this development may not be limited to India. The definition of "Content" as a virtual property emerging out of this development will have implications on Cyber Jurisprudence in general and may be quoted as an accepted precedence elsewhere in the world. With international treaties on the Hague model being round the corner, it would not be long before the impact of this kind of legislation starts affecting Netizens in USA or other countries outside India.

July 11, 2001 

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