It is budget time in India. As in all the previous years, one of the
main challenges to the Finance minister is to find new avenues of revenue
for the ever-increasing cost of “Governance”. In the recent days, India
is pursuing a policy of “Privatisation” of public enterprises. Accordingly
many infrastructure activities have been privatized. More are in the offing.
But this has not reduced the Government expenditure by any means. The Government
continues to spend more and more for doing less and less. But the taxpayer
in the country is always asked to contribute to the Government kitty because
it is the responsibility of the “Citizen”. This year too therefore
there will be a need for Indian citizens to contribute to the national
Tax kitty more so because of the natural disasters that the country had
to contend with. In this hunt for avenues of taxation, Indian finance minister
is looking forward to taxing “E-Commerce” this year. We understand that
Mr Dewang Mehta President of NASSCOM and Mr Pramod Mahajan, Minister of
Information technology are trying to lobby for a deferment of this decision.
In the light of this discussion, it is necessary for us to look at the
economic and legal issues behind E-Commerce taxation.
Who Will be Hurt?
Many analysts perhaps think that E-Commerce Tax will only hurt
IT Companies such as Infosys and Wipro which are any way making profits
by hundreds of crores. They therefore think that it is not unreasonable
to tax this segment. This perception is in correct and highlights the need
to understand the nature and scope of “E-Commerce Taxation” before
we discuss whether it has to be taxed and if so, by how much.
One of the reasons for discussing the nature and scope of E-Commerce
taxation at this point of time is, if the law of taxation recognizes certain
activities as “E-Commerce”, certain properties as “E-Properties”, certain
revenues as “E-Revenues”, then they get some kind of legal sanctity. It
would later be difficult to reverse this deemed definitions. There could
also be some conflicts with other parts of law arising as a result of these
definitions which could lead to legal complications.
An example of such a possibility is available in the definition of a
web portal as “Advertisement” in the IRDA guidelines. The problems of wrongly
defining a provision in the statute is already evident in the definition
of what is normally known as “Cracking” as “Hacking” under the ITA-2000.
This tendency to introduce unnecessary legal definitions in statutes has
continued even in the Communication Convergence Bill which
inter-alia defines the crime of “Cyber Stalking”. In order to avoid
Income Tax Act attempting to define what is a “Domain Name”? and “What
is a Web site?” without understanding the consequences, it is necessary
to debate certain issues before we think of E-Commerce taxation.
This is the objective of this article.
E-Commerce Tax as Tax on E-Sales
The common understanding of E-Commerce today in the circles, which are
advocating E-Commerce tax, is that a Company is using Web as a means of
making sales and this results in profit, which is taxable. To the extent
Web is a medium through which a “Brick Company” can make sales, there is
no problem in understanding the taxation aspects of “E-Sales”. The ITA-2000
is clear as to the incidence of Cyber Contracts, their place and time of
execution. Hence, if Sales take place through the Net, it is not difficult
to understand the implication of Sales or Income Tax. These transactions
are taxable under the present provisions of taxation and there
is no need to talk of E-Commerce Tax except to provide an “Exemption".
The Benefits of Exemption of Tax on E-Sales
There is of course a strong case for exempting tax on such E-Sales
as a measure of encouragement to the industry. This is similar to the Export
incentives that were prevailing in India until recently for Software and
other sectors. The need for such exemption has to be viewed from the point
of view of the impact of taxation on the community. Here we need
to recognize that this kind of tax is not going to affect the Wipro s and
Infy s. It affects a different class of Companies and Entrepreneurs who
hold the promise for taking IT to masses.
The negative effect of the E-Com tax will fall on three other kinds
of companies. One is the set of new generation of E-Biz services companies
who run E-Commerce services such as a “ Transaction Portal”. These are
the “Dot Com” companies who trade on content. It is out of such companies
that Satyam Infoway and Rediff have emerged to list their shares in the
Nasdaq. If E-Com tax is exempted , these companies will be able to ride
through thin initial revenues and grow to be the Amazon.com s of
India. More significantly, this will remove the burden of having
to manage the “Tax administration” which would be both expensive and frustrating
for the Techies. Many of them would prefer to close shop than to face the
“Tax Officers” on a “Routine Survey Mission”.
Second are the companies who develop software for the E-Biz sector.
Typically these are small to medium companies who survive on small contracts
of web designing and development. They mostly consist of individual
entrepreneurs with technical skills trying to stand on their own legs.
A few of them have graduated into small public limited companies and will
in future turn out to be significant players. But a majority
of them will remain “Self Employment Propositions”. If E-Com Tax
is exempted, a few these companies can grow to be the Microsoft s of India.
Yet another important segment that would be affected by E-Com Tax would
be none other than the “Old Economy Companies” themselves. We need to
remember that the next generation of development in the IT sector in India
is to be fuelled by the “Convergence of the Brick and Click”. The globalization
policies of the Government has already suffocated many of the traditional
companies to near extinction. Now the only hope that these are holding
are the “E-Strategies” through which they expect to survive and grow
in future. Amongst such companies are the likes of Tisco and Mahindras,
Banks like Bank of Punjab and Vysya Bank, FI s like IDBI and
UTI. If E-Com profits are not taxed, these companies may be able
to use their enormous “Brick Strength” to overcome the disadvantages of
inefficient infrastructure and manpower they have been saddled with due
to historical reasons.
The Ambiguities:
While taxation of E-Sales is only an economic issue, the issue
of E-Commerce taxation has many legal issues. For example what is “E-Commerce
?”. Is it restricted to exchange of goods and services on the Net for “Cash”?.
If provision of a service such as “Download of software or
Music” for a price is “Taxable”, what would the value of a “Shareware”
where you allow a conditional use of the service for a restricted period?
If the user continues to use it beyond the initial trial period, will
it be treated as a “Deemed Sale” ? .
If so will it be taxed even if the “receivable” is outstanding?
If the E-Commerce company does not show it as outstanding, will it
be treated as “Suppression of Income”? Or
Should E-Commerce companies follow “Cash system of accounting only”?
Similarly, what is the taxability of a service which is given free?
Should it be treated as “Gift”?
What is the taxability of service exchanged for aanother
service?
These are all issues for which there are no answers of now.
Virtual Properties:
Another area of contention is how to tax “Virtual Properties”?.
For example you buy access service from VSNL at Rs 750/- per
100 hours. Similar product is given free by caltiger.com. Is it a deemed
income in the hands of the recipient?
There is a site which donates say Rs 0.25 to a charitable organization
every time you click on an ad. Is it income received and donated for a
charitable cause? We cannot ignore it just because the amount involved
is insignificant. It is a question of principle. At the aggregator’s
end anyway the receipt is substantial. Should it be considered as an income
and a donation at their end?
Some body purchases a domain name for Rs 400/-. He transfers it for
Rs 1 lakh. What kind of property transfer is it? Is the difference a Capital
gain? Short term? Or Long term?
Domain names can be booked from one year to 10 years at present. Therefore,
if a company owns a “Domain Name”, can it depreciate it over time? What
happens to the un-absorbed depreciation if the Domain name is not renewed?
An assessee has a web site which a Fund body has valued at RS 10 crores.
Is it a fixed asset for the Company? say if it has bought it for cash ?
What is the value of each page of content in the web site? Is it subject
to wealth tax? Can the web site with multi crore value be attached by the
IT department?
etc are other questions which defy easy answers.
Virtual Currency:
There are sites where you can earn “Coupons” or “Points” which are encashable
on other sites. Is it income earned?
..is another question which needs to be pondered
.
Value of Virtual Content:
Virtual Content has a value and a Copyright. If this copyright is transferred
or content shared, there is an exchange of value. Is it a taxable receipt?
If so what are the expenses that can be set off against such content sharing?
...is one more question to find an answer to.
The issues in Cyber taxation are therefore many. It is possible for
the IT department to bring any of the above transactions under the “Tax
Net”. But the confusions that such a provision may create in the legal
definitions of various parties and the liabilities there-on are tremendous.
Unless a comprehensive view is taken on the legal status of different
types of properties created on the virtual world, it will be premature
to introduce Taxation on the E-Commerce . Only then one can discuss what
is the fair rate of taxation of these transaction.
Right To Tax
Last but not the least, if the Cyber World creates a Cyber Wealth for
a Cyber Citizen, what is the right for the Physical Government to tax the
Cyber Citizen? Will such “Right to Tax” extend from a Cyber Citizen to
a “Netizen”? who is the citizen of the Virtual world which does not belong
to any physically bound Government?
…Or in the process of giving the “Right To tax” to the physical Government
of a Country, are we creating a right to the Government on the “Cyber Space”
owned by the individuals of a Country?. If I hold dual citizenship, then
which Government will have the right to my Cyber Space and Cyber property?
Or will the Cyber Space belong to the Country where the “Server” resides?
Or where the Owner of the content resides? Are we then indirectly creating
Cyber Nations within the virtual world ? Are we then infringing on the
Rights of the Netizens through a taxation Law?
..and many more questions remain unanswered.
I wish all these complications have been analysed and an answer
found before we move to the era of Cyber Taxation.
Naavi
February 15, 2001
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