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
