Paper presented in International Cyberlaw Seminar on Cyberspace Usages and Disputes, Kochi, Kerala, India
Cyberspace is a virtual trading shop, from where income is generated, sale and purchase are transacted, service to clients and entertainment and luxuries to the customers are offered. Considering the enormous scope for commercial activities, it can be a meadow of taxation giving a wider scope to the State to generate public revenue.
1. Introduction
Tax is a mandatory imposition by the sovereign without any guarantee of special benefits. The imposition of tax is a constitutional function. Such an imposition may be either upon person or property or privileges or occupations or enjoyments of the people. Obviously, the primary implication and object of taxation is to raise money for the purpose of the Government, by means of contribution from individual persons.
While levying a tax, the State, to some extent, brings in measures to regulate the business activity or the consumption of a commodity or service or even accumulation of wealth in the hands of a few. Neutrality is an essential precept of taxation which proposes that economically similar income should be taxed similarly. Thus the taxation principles that apply to the conventional taxation events should also apply to, in the same spirit and force, in the cross- border transactions connected to cyberspace.
Is not a cyberspace, adaptable to the taxing power of the sovereign? This is a debatable question in the current scenario. The e-space has a vital role in the contemporary society and mainly e-commerce presents enormous challenges to the international tax regime, which focuses on territorial and personal bases of tax jurisdiction.
2. Scope for Taxation in Cyberspace
E-commerce is one of the latest contributions of technological growth. E-commerce consists of the buying, selling, marketing and servicing of products or services over the computer networks. Originally, internet facilitated commercial transactions, including sale, electronically. It was, usually, for limited purpose, by using technology like Electronic Data Interchange, to send the commercial documents like purchase orders or invoices electronically, in the course of sale of goods. But, it has developed from a mere means of communication to a mode of carrying the real commercial activity itself.
Of course, Income generated by an e-service provider or an e-commerce man is taxable under the direct taxation, Income Tax Act. The creation or development of software can be a point of taxation under the excise law. Software can be developed and installed by sharing the computer or server, even by a remote access, through a teamviewer solution. Transfer of rights, either under lease or under a sale, in the course of e-commerce business can be taxed under use or consumption tax or sales and value added tax. A service provider is liable to pay tax under the service tax regime for his turnover derived from the service, which he has done in the cyberspace.
The ongoing development in information technology facilitates sale and purchase of goods and services over the World Wide Web via secure servers, specially designed for confidential ordering data keeping customer protection, and with the help of e-shopping cards and with electronic pay services, like credit and debit cards.
Any product that can be digitalised is amenable to sale and delivery, electronically. This would include books, newspapers, CDs, motion pictures, photographs, airline and movie tickets, and video and sound recordings. Even the saleable commodities like patent, designs and trademarks, which are digitally convertible can also be the object of electronic commerce, whether in the form of a total transfer or in the form of partial transfer of rights.
E-commerce has a vital role in the areas of entertainment industry. A wonderful movie having international recognition can be downloaded and seen through websites by paying charges. Any books attained worldwide popularity can be read in a website by viewers by paying charges, all over the world. A newly introduced song of an admired pope singer can be accessed and stored by his admirers around the world, through the browsing and downloading. While watching such a movie or reading such a book or listening such a song, certainly transfer of information takes place, either as sale, or as service.
3. Issues in Cyberspace Taxation.
Like any other legal systems, there are challenges, inevitable in the field of cyberspace taxation also. Such tax challenges are unique through out the world, evidently in gaining jurisdiction to set the rules, to judge and enforce the municipal taxation laws to the cyberspace. There are other areas which raise cross boarder legal issues like, conflicts in applying different principles of law. In international taxation, income earned from the economic activity by a resident of one country in the territory of another country can be subject to levy of tax on income in both the countries. The home state justifies in levying tax on the basis of residence rule, however the host state may impose the tax on the basis of source rule.
3(i). Jurisdictional Issues in E-commerce
When e-commerce enables transaction of sale and services, across borders there is unavoidable ambiguity regarding jurisdiction and the applicable tax law. Parties to a cyber generated contract may be located in different jurisdictions which may have serious implications in the interpretation and enforcement of the law. Is it the municipal law of the country or the law of other party having foreign jurisdiction that covers the field? The traditional rules of private international law state that the jurisdiction of a country extends only to individuals who are within the country or to the transactions and events that occur within the natural boundary of the country[1]. There are some important principles governing the issues.
3(i)(a). Theory of Minimum Contacts
The theory of minimum contacts would mean that even if a person is not physically present in a country, he can be proceeded in that foreign court as long as his website has minimum contacts with that country. This general law has universal application. Normally a service provider may insert appropriate choice of law in the online contracts, including specification of the jurisdiction to which the parties to the contract would be subject to and such clauses are binding upon the parties[2].
3(i)(b). Source and Residence Principles.
The principles of source or residence govern the jurisdiction of taxing subject, apparently, in direct taxation. As per this principle, the income is subject to tax where the income is sourced or the subject has the residence. However in taxing of E-commerce, application of the principles may hit the regional balances, at least in cases where major portion of goods are sourced in one region and largely consumed in another region. In cases of countries, which are having vital monopoly on software and other digital exports, the application of source principles in E-commerce sale will definitely result in regional imbalance, if the sales are not attributable through a permanent establishment in the other country. The principle of residence is also inapplicable in certain areas of taxation that taxes on E-commerce sales, since majority of e-commerce service providers exist in cyberspace only. Of course, in such cases the residence of such sellers can be attributable to the location of the server that hosts the home website of the seller.
3(i)(c). Concept of Permanent Establishment.
The concept of ‘Permanent Establishment’ suggests that if the activity passes the permanent establishment in the source country, that country would have the primary right to tax the activity. The permanent establishment is defined in the OECD Model Tax Convention to mean, the fixed place of business through which the business of an enterprise is wholly or partly carried on. It may be a place of management, a branch, an office, a factory or a workshop.
Where a person is acting on behalf of an enterprise and has habitually exercised an authority to conclude the contracts in the name of such enterprise, it is deemed that such enterprises shall have a permanent establishment in such place. However if a broker, general commission agent or any other agent of an independent status is acting in the ordinary course of their business, it cannot be said that the enterprise is having a permanent establishment in such place, merely for the reason that business is carried through such persons.
When a foreigner leaves the management of his domestic share portfolio with a stockbroker in a country, such agency will not constitute a permanent establishment. Thus a website hosted on a server owned by a domestic independent agent like an ISP (Internet Service Provider), would not constitute a permanent establishment. A vendor’s home page on the internet and the access of the internet provided to that homepage do not give rise to a permanent establishment, since the vendor does not have control over any of the appliances necessary for data transmission, in a country.
A different version is that a web page is likely to constitute a permanent establishment in the country where the host computer resides. It is because a web page can have a physical presence, as it is made from binary or digital code and is housed on a magnetic surface, usually a disk of some kind. Such a binary code is viewable using the computer and communication device.
3(i)(d). Theory of Physical Presence.
The primary determinative and widely accepted factor regarding exigibility of tax on cyberspace or e-commerce is the physical presence of seller or service provider in the customer’s state. For determining whether seller or service provider has physical presence, or a level of activity, the significant tests are that either the entity must be owning or renting property in that state or having a warehouse or a fulfilment house that maintains inventory for seller in that state or having employees in that state or promoting his business in that state through something like a trade show.
The Courts in the
3(ii). Issues in Identification of Parties
Identity of parties to a contract is one of the keen issues to be resolved while performing e-contracts. Unlike communications of offer and acceptance through postal means, in internet communications, it is not possible to locate the exact place of the parties, in the first instance. It can be possible only through decoding of protocol addresses and through other technological solutions, which are time consuming and highly technical.
Transactions on the internet, particularly consumer- related transactions, resulting in sale or service contracts, often occur between parties who have no pre-existing relationship, which may raise concerns of the person’s identity with respect to issues of the person’s capacity, authority and legitimacy to enter into a contract.
3(iii). Relative Issues of E-Commerce Taxation
The physical supervisions over the movement of goods or service are some of the prime concerns in taxing e-commerce. In e- commerce, the majority of sales or service are relating to intangible goods that are without the need to provide tangible personal property to the customer; sale and service can be effected through transfer of intangible properties.
3(iii)(a). Administration of Tax
In the traditional system of trading, with respect to the main street-retailers, the administration of tax is easier. The tax on sale or service is, of course, an indirect tax and it is the primary duty of the traders or service providers to collect and remit the tax to the State ex-chequer. However, the e-commerce businessman may not be obliged to comply with such statutory requirements in the absence of regular supervision of his business. The role of consumption tax, in relation to tangible properties, is significant in such situations. The liability, in such cases can be fastened on the importer or the person who consumes the goods.
In cases of electronic supply of intangible goods, domestically, there is not much difference, as the domestic dealer has an obligation to collect the tax and such trades are subject to tax audit also. But difficulty may arise when the trader destroys his back-up. In cases of electronic supply of intangible goods by a foreign supplier, such supplies satisfy the requirement of import sale and the tax can be levied on the importer, who consumes such goods. Such use tax is usual, when the seller is incapable of taxing the sale, because he has no nexus with the destination state.
It is an undisputed fact that E-commerce is having a dramatic impact on almost all aspects of business. It has opened a global market with global suppliers across the nations. Though regulatory measures were introduced to regulate and protect the issues of intellectual property rights in the field of cyber space, the law on tax administration is not yet fully developed.
The consequence is that the technologically advanced and high earning society, who builds e-commerce as parallel market, is out of tax administration. So either the concept of sale tax should further be modified to cover the field or the taxation jurisprudence should advance further by developing alternative devices to fill the gap.
When an e-commerce service provider projects certain information to its customers, through the website, by charging money through credit card payments, and the customer only exploring such information to their mind or even writing down it into their notebooks, can it be said that any transfer of goods are effected between the web site owners and customer. Further more, a mere download may create a virtual recycle bin with unnecessary downloads in temporary internet folders or cookies, a temporary storage, which the person really did not intend. In fact, whether the taxman can tax such downloads, naming it as sale or service or under the guise of deemed income arising from it.
It is as if a software is hosted in a client’s computer from a remote programming terminal located in far away place to constitute transfer of intangible goods through communication devices. It is the law that even if it is not recorded in tangible media, but only passed through a deputing personal, there is transfer of property in goods exigible to the sales tax. A momentary service of passing of information, which is a valuable intangible property, can thus be treated as sale for the purpose of taxation. The taxing authorities are seriously thinking to curb the situation of tax avoidance in like transactions.
While taxing a commodity, as an article of merchandise, there must be an incidence for tax, i.e., the sale. It is not that the commodity is subjected to tax, but it transfer as sale which is subjected to tax. In imposing the sales tax, one of the difficulties, which confront the Taxman, lies in the selection of the point of time at which the tax shall be attached and become due. In the case of an ordinary retail sale for cash across the counter of shop, the stages of agreement, appropriation of the goods to the contract, delivery, payment of the price and passing of the property are all practically simultaneous[5]. On the other hand, in transactions like E- commerce, which are more complicated in nature, it is difficult to find out these stages independently.
3(iii)(b). Situs of Business
When the act of sale or service is the subject of taxation, the place of such event has relevance. There must be a situs of sale or service. Sale consists of a number of ingredients, such as existence of goods which form the subject matter of the sale, a bargain or contract of mutual consent, which, when executed will result passing of the property in the goods for a price, the payment or a promise to pay the price and the passing of title[6]. When all of it takes place simultaneously, there is no difficulty to ascertain the place of sale. When one or more ingredients take place at different places, it is difficult to find out the situs of sale.
In e-shopping, the situs of sale is not certain. Goods can be ordered from one place, payment can be effected from another place and the goods can be accessed from a place other than the above two. There are cumulative incidents taking place to finalize the sale of the goods. Can there be levy of sales tax in all places? When the sale occurs with respect to a physical substance, and the sale being proximate cause of movement of goods from one place to another, it is easy to find out the physical transfer of goods by way of delivery. It is not possible to adopt this principle, when intangible properties are transacted through the cyberspace.
3(iii)(c). Culmination of Contract
A binding contract is constituted by acceptance of an offer. The acceptance must be reaching the seller at the time the contract is completed. During electronic offer and acceptance a number of questions will arise. Can a mere action of downloading be considered as the acceptance? The user may discard a surfed material, visuals, or writings. A click on the options in the website cannot be a full acceptance of the information, though a seller anticipates the placing an offer through the website. Without the use of encryption technology, the reliability and acceptability of email, is an added difficulty. In systems in which electronic messages are sent, over communication networks, it is certainly possible for someone to prepare and transmit an E-mail message or an acceptance and to make it appear that it came from someone other than the true maker. When authenticity of generation of messages, itself, is doubtful, it is not easy to deal with the taxing subject for taxation, on the basis of such mail orders.
4. Conclusion
E-commerce, being a technologically oriented commercial activity, there are fewer prospects to supervise the trading and services. The cross- border elements in E- commerce make the subject more intricate. In the real world, taxing is a sovereign function and is subject to the territorial limitation and to the Constitution of the country. Revenue interest of country may govern the fiscal policy of the sovereign and in e-commerce there being no territory as part of any sovereignty, it is impossible to lay down a universal formula, in the absence of an International Charter.
An international charter can save a country to enable exchange of information that is either in its possession or obtainable by it when the information is needed to the taxmen in other countries. The co-ordination of countries can be ensured by an exchange of information agreements, as in the case of Organization for Economic Co-operation and Development (OECD). The OECD has promulgated a model information exchange agreement similar to the tax information exchange agreement negotiated by the
The theory of physical presence[7] is suggested to resolve the phenomenon of tax evasion in cyberspace. The country where the seller or service provider has his physical presence, he is obliged to tax his sale or service or income, under the notion that the sale or service is deemed to be completed or income is generated in his hands. This can be adopted as a universal rule. Yet, the proposition of deemed physical presence generate further difficulties, as a universal rule is impracticable, if the countries are in the habit of making legislation defining physical presence as fictional presence, to mean that any kind of presence enjoin physical presence for the purpose of taxation.
BIT-Tax[8] is a novel concept, evolved by the taxman to tackle his worries of tax erosions. This is a system of taxing Internet usage by volume and a turnover tax on interactive digital traffic. The bit tax would not discriminate between telephony, data, voice, images, or other content; it would apply based on the volume of data transferred. The collection of bit tax or byte tax is more convenient to the taxman that it can be implemented through the internet service providers as the collection agents of the tax. In relation to levy of direct tax on income, imposition of tax may be on the person who gets the receipts that result in the creation of assets in the form of movable or immovable properties.
This is high time, that the countries like
How far the generation of income or e-service or e-commerce sale be scrutinised by the taxing authorities for the purpose of levy of tax. Which is the enjoined point of the cyberspace transactions? Earlier the tax authorities have not given much attention to the tax erosion that may result due to the massive growth of e-commerce. Realising the potentials of earning tax from e-commerce, tax authorities are now examining the tax implications of e-commerce transactions and resolving mechanisms to tax such incidences. The problems of tax erosion in e-commerce are larger issues in the developed countries as well as in the developing countries. In the absence of tax on e-commerce, prospect of tax evasion among the high income group of the society, who can afford the technology of online shopping and services, remains as an evil, which may raise issues of discrimination in taxation, i.e. taxing of ordinary customers and leaving aside the high income group. It may be true that any tax law or policy does not have any ready answer to the issues posed by the cyberspace. At the same time a tax-free cyberspace in perpetuity is a dream, not a reality. In several countries, including in
Dr. Pradeep Kodiyath Patinhare
[1] Cheshire and North, Private International Law, 11th edn. at p. 188
[2] Compu Serve.Inc v. Patterson, 89 F.3d 1257 (6th Cir.1996).
[3] National Bellas Hess, Inc v.
[4] Quill Corporation v.
[5] King v. Dominion Engineering Co. Ltd., [1951] 2 STC 67 (PC).
[6] State of
[7] This theory is based on the
[8] BIT tax is a method to tax all interactive digital information and the tax revenue will directly flow to the national revenue of the respective country. Under this tax system, the number of bits or bytes is considered as a more representative unit to provide an indication of such transmission intensity than time or distance. The BIT tax can be administered by collecting tax through ISP on the basis of actual web-surfing or usage.
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