Open Access Research Article
E-TAXATION ISSUE IN CYBERSPACE
Published Paper
Article Details
E-TAXATION ISSUE IN CYBERSPACE
AUTHORED BY
- MINSHI SINHA
BB.A LL.B 3rdYEAR
C 6
Bharati Vidyapeeth
(Deemed to be University), New Law College, Pune
ABSTRACT
This topic is all about e-taxation issue
in cyberspace. The scope for taxation in cyberspace, issue in cyberspace which
includes jurisdictional issue, identification
of parties issue,
and relative issues,
all are mentioned
in this topic. It talks about the arrival
of E-commerce which had a transformative impact
on the global marketplace, connecting suppliers from different
countries. However, the tax administration framework for this sector is lacking
in development, leaving individuals in technologically advanced
and high-earning roles within
E- commerce exempt from taxation. The
challenges in taxation arises from the difficulty in knowing the exact moment
when sales tax should be imposed. Unlike traditional retail sales, where
various stages occur simultaneously, such as agreement, goods appropriation,
delivery, payment, and property
transfer, E-commerce transactions are more complex. The different stages of an
E-commerce transaction do not occur simultaneously, necessitating a reevaluation of tax administration
strategies to accurately capture the tax incidence at the rightjuncture.
KEYWORD
Digital taxation, transaction, commercial transaction, equalization levy, sine qua non, modern tax, jurisdiction, government,
e-space
INTRODUCTION
India
has across a very long journey of doing the commercial transaction, right from the barter
system to the electronic medium. Indeed, is one of the countries which is
seeing continuous growth in transaction being concluded over the internet.
Digital taxation is also known as equalization
levy and India is the first country in the world to introduced the digital taxation
in the year 2016. The sine qua non for taxing any person in India is
either he should be resident of India, or the
income should accrue or arise
in India i.e. the source
of income should be from India. E-taxation or electronic taxation, has emerged as a
crucial aspect of modern tax system aiming to adapt traditional tax principles
to the digital age. In the realm of digital taxation in India, a pivotal moment
occurred in 2016 with the introduction of the
equalization levy. This strategic move aligned with the OECD’s Base Erosion and
Profit Shifting (BEPS) initiative, focusing on the taxation of e-commerce
transactions1. Enacted through the finance act of 2016,a new chapter
was added, known as chapter VIII, specifically titled “Equalization Levy.” 2The
inception of this levy was a direct outcome of a recommendations put forth by a
committee on Taxation of E-Commerce, which was established by the Central
Board of Direct Taxes withinthe department of Revenue under the
ministry of Finance, Government of India. With the rise of e- commerce and the
prevalence of cross-border transactions, there is an urgent
need to address the challenges in taxing digital
transactions effectively. 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. Thedigital
landscape plays a crucial role in today's society, and notably,
e-commerce poses substantial challenges to the international tax system, which
centres on territorial and personal foundations
of tax jurisdiction. The strong connection between tax matters and other legal
issues in cyberspace underscores the significance of addressing the cyberspace
law literature in tax discussions. Overlooking this crucial aspect poses a
significant problem. Closing this essential gap not only facilitates valuable
research but also enriches the body of literature on cyberspace law.
SCOPE FOR TAXATION IN CYBERSPACE
E-commerce stands
as one of the recent
advancements in technological progress. It encompasses the activities of purchasing,
selling, marketing, and servicing products or services through computer networks. Initially, the internet facilitated
electronic commercial transactions, typically for specific purposes, employing
technologies such as Electronic Data Interchange. This facilitated the electronic
transmission of commercial documents, such as purchase orders or invoices,
during the sale of goods. However, over time, e-commerce has evolved from being merely a communication tool to
becoming a platform for conducting the actual commercial activities themselves.
Of course, any income earned by an e-service provideror an individual engaged
in e-commerce is taxable as per the provisions of the Income Tax Act.A
software’s development can count as a means of taxation under excise law. The
process of creating and installing software can be done through combined
1Indianlawportal- https://indianlawportal.co.in/taxation-in-e-commerce/ (last visited on 28th January 2024)
2 Taxguru - https://taxguru.in/income-tax/digital-taxation-india.html (last visited on 28th January
2024)
efforts
where shared computerresources are used or even remote access solutions like
TeamViewer may be utilized. These rights may involve taxes relating to use,
consumption, sales, or value-added tax when they areleased or sold
within the confines
of the internet business world. Additionally, a service
provider must fulfill tax obligations according to service tax regime for
turnover from services rendered in digital domain.
ISSUES IN CYBERSPACE TAXATION.3
Internet taxation, like any legal system, is not an easy road. The uniqueness of these tax issues
on a global scale can be seen in the determination of who has the power to
formulate, choose and execute local norms of taxation that govern cyberspace. Other causes of international legal complications could be related
to disputes arising
from application of different legal
concepts. Whereas both countries
have international tax laws under
which residents pay income taxes for
economic activity done in another state’s territory, the same activity may be
liable for double taxation by two countries according to their national
legislation. The source principle allows for taxing in accordance with host
country legislation while the residence principle permits home states to tax on
basis of residency criteria.
Jurisdictional Issues in E-commerce
The
transfer of goods and services across borders made possible by e-commerce
inevitably raises questions about jurisdiction and applicable tax laws.
A contract made online may have parties that are located in various countries,
which could have a big impact on how the law is interpreted and applied. The issue is whether the other party's foreign jurisdictional law or the
nation's domestic law applies in this situation. According to conventional
private international law norms, a nation's jurisdiction normally extends to
people living within its borders as well as transactions and events taking
place inside its natural bounds1. These matters are governed by
several fundamental principles.
(a)
Theory oh Minimum contacts.
The
concept of minimum contacts implies that an individual can be subject to
proceedings in a foreign court,
even if not physically present in that country, as long as their
website establishes
4 Cheshire and North, Private International Law, 11th edn. at p. 188
3542.asp ( last visited on 28th January 2024)
minimal
connections with that jurisdiction. This principle has broad applicability universally. Typically, a service
provider has the option to include a suitable choice of law in online contracts, specifying the jurisdiction to which theparties in the contract would be
subjected. Such clauses are legally binding on the involved parties2.
(b)
Source and Residence Principles.
In
direct taxation, the principles of source or residence usually determine the
jurisdiction of taxing subjects. These principles state that income is taxable
depending on the subject's place of residence or the source of the income. The
use of these principles, however, may have an impact
on regional balances when it comes
to taxing e-commerce,
especially in cases when a sizable amount of items are sourced in one region but are mostly
consumed in another.
Applying source rules to
e-commerce sales in nations that have
a large monopoly on software and other digital exports may cause regional
imbalances unless the sales are attributed to a permanent establishment in the
other nation. Additionally, there are restrictions on the residence concept in
some sections of taxation that pertain to e-commerce sales, given that a
majority of e- commerce service providers solely exist in cyberspace. In such
cases, the residence of these sellers
can be associated with the location of the server
hosting the home website
of the seller.
(c)
Concept of Permanent Establishment.
A
"permanent establishment" suggests that the primary right to tax an
activity is with the country of origin, if the activity meets the requirements
for a permanent establishment there. A permanent establishment is described as
a fixed location of business where an enterprise conduct all or some of its
operations under the OECD Model Tax Convention. This can apply to a factory,
workshop, office, branch, or managerial location. An enterprise is said to have a permanent
establishment in a place if a person acting on behalf of the
enterprise regularly possesses the power to sign contracts in the name of the
enterprise. But if a general commission agent, broker, or other independent agent is carrying out business
as usual, in the normal course of their
activities, it cannot
be asserted that the enterprise has a permanent establishment merely
because business is conducted through such individuals.
6Compu Serve.Inc v. Patterson, 89 F.3d 1257 (6th Cir.1996).
For instance,
if a foreigner entrusts the management of their domestic
share portfolio to a stockbroker in a country,
such agency does not constitute a permanent establishment. Consequently, a website
hosted on a server owned by a domestic independent agent, like an Internet Service Provider (ISP), does not qualify as
a permanent establishment. Neither a vendor's homepage on the internet nor the
internetaccess provided to that homepage establishes a permanent establishment,
as the vendorlacks control over the necessary transmission equipment within a
country. Another perspective is that
a web page may be deemed
a permanent establishment in the countrywhere the host computer is located. This is because a web page has a physical presence,being composed of binary or digital code and housed on a
magnetic surface, typicallya disk. This binary code becomes visible using a
computer and communication device.That arrangement is still
not considered a permanent establishment when a non-residentassigns a stockbroker in a
given country the responsibility of managing their
local shareportfolio. A website that is
hosted on a server owned by an Internet Service Provider (ISP) or any other
domestic independent agent does not meet the threshold for being termed as a
permanent establishment either. Since the vendor does not possess control
over required hardware to enable data transmission
within this country, the vendor’s online site together with its internet access
do not amount to permanent establishment.According to a different
interpretation, a webpage could be considered a permanent establishment in the nation
where the hosting computer is situated. This is rooted in thephysical reality of a webpage,
which is made up of digital
or binary code and is kept ona
magnetic medium, usually a disk. This binary code can be accessed with the use
of acomputer and communication equipment.
(d)
Theory of Physical Presence.
The most important and widely recognized element affecting the application of taxes to online or e-commerce is the seller's or
service provider's physical presence in the state where the client is located. Key indicators that help determine this physical
presence or activity level are
having employees located in that state, owning or renting real estate there,
having a warehouse or fulfilment
house there that stores inventory for the seller, and promoting your business there
by attending trade shows or other
events.
Regarding this, the US courts take a practical legal stance. They contend that a
seller or service provider is not subject to state jurisdiction for legal actions
if they only keep up a web presence in a location without
engaging in any real economic
activity there. The U.S.
Supreme Court decided
in the National Bellas Hess,
Inc. case [3] that retailers could only be required to pay user taxes
in jurisdictions where they have a particular degree of physical presence. States'
ability to tax interstate mail-order or catalogue transactions was severely limited by this
ruling. The U.S. Supreme Court subsequentlydeclared in the Quill [4]
decision that defining the parameters of the nexus theory— which establishes the relationship between a
firm and a state for tax purposes,
falls within the purview of Congress to safeguard the
interests of state revenue.
1.
Issues
in Identification of Parties.
One
of the biggest challenges with e-contracts is figuring out who the parties are.
Internet communications lack an instant way to determine the precise locations
of the people involved, in contrast to traditional postal communications, where
the locations of senders and recipients are readily evident. Finding these
places requires a time- consuming and highly technical procedure of decoding
protocol addresses and using other technological methods. Online transactions
sometimes include parties without prior relationships, especially when they are connected to consumer activities that result in sales
or service contracts. This dynamic calls into question the persons' identities,
including questions about their ability, authority, and right to participate in a contract.
2.
Relative
Issues of E-commerce Taxation.
One
of the key issues in taxing e-commerce is regulating the actual transportation
of products or services. In the world of e-commerce, a major share of sales or
services include intangible items, which eliminates the need to transmit
physical personal property to customers. The transfer of intangible properties
facilitates the selling and provision of services.
(a)
Administration of Tax.
In
conventional trading systems, especially concerning brick-and-mortar retailers,
tax administration is more straightforward. The taxation on sales or services
is categorized as an indirect tax, and it falls upon the duty of traders
or service
7 National Bellas Hess, Inc v. Illinois, 386 U.S. 753 (1967)
8 Quill
Corporation v. North
Dakota, 504 U.S. 298 (1992)
providers
to collect and transmit the tax to the state treasury. However, for e- commerce
entrepreneurs, adherence to these statutory requirements might not be
obligatory when there is a lack of regular business supervision. The importance
of consumption tax, particularly in the context
of tangible properties, becomes evident in
such instances. In these cases, liability can be assigned to the importer or
the individual consuming the goods.
In situations where intangible goods are electronically provided within a
country, there is no notable difference as local vendors
are required to collect taxes,
and these transactions are
subject to tax audits. Difficulties may arise, though, if the trader gets rid
of their backup records. On the other hand, when a foreign supplier
electronically supplies intangible goods, these transactions meet the
requirements for import sales, enabling the imposition of tax on the importer
who utilizes these goods. This use tax is common when the seller cannot impose
a sales tax due to their lack of connection with the destination state.
E-commerce has transformed the global economy
by linking providers from various
locations. However, the tax administration structure for this industry is still
under development, therefore persons in technologically proficient and
high-paying professions within E-commerce are free from taxation. To overcome
this issue, either substantially adjust sales tax principles or investigate other taxing techniques more suited to the specific
nature of E-commerce.
The intricacies of E-commerce transactions, which include intangible
items and downloads, make it difficult to determine the right taxes
processes. Tax authorities are continually researching
proactive solutions to prevent potential tax evasion in the field of
e-commerce.
One particular obstacle in taxing stems
from the difficulty in
pinpointing the exact instant when
sales tax should be imposed. Unlike traditional retail sales, where various
stages occur simultaneously, such as agreement, goods appropriation, delivery,
payment, and property transfer, E-commerce transactions are more complex5.
The different stages of an E-commerce transaction do not occur concurrently,
necessitating a re-evaluation of tax administration strategies to accurately
capture the tax incidence at the right juncture.
(b)
Situs of Business.
There
is no discernible difference when intangible products are supplied
electronically within a nation since local vendors must collect taxes and these
transactions are vulnerable to audits by the government. But if the trader destroys
their backup data, problems might occur. Intangible products, on the other
hand, can be electronically supplied by a foreign provider and fulfil import
sales rules, allowing the importer using the items to be taxed6.
When the seller is unable to collect a sales tax because they are not connected
to the destination state, they frequently apply this use tax.
(c)
Culmination of Contract.
The
determination of the situs of sale or service becomes crucial when it comes to
the taxation of such transactions. A situs of sale or service must exist. A
sale involves several elements, including the presence of goods that are being
sold, a mutually agreed-upon bargain or contract, the transfer of property in
the goods for a price upon execution, the payment
or promise to pay the price,
and the transfer of title. When all of these elements occur
simultaneously, it is easy to determine the place of sale. However,
if one or more of these elements
occur in different locations, it becomes
challenging to establish the situs of sale.
In the case of e-shopping, the situs of sale is uncertain. Goods can be ordered from one location, payment can be made from
another, and the goods can be accessed from yet another place. Multiple
incidents occur to finalize the sale of the goods. The question arises whether
sales tax can be levied in all of these places.
When
a sale involves physical goods and the sale itself causes the movement of goods
from one place to another, it is relatively simple to determine the
physical transfer of goods
through delivery. However,
this principle cannot
be applied when intangible properties are transacted
through cyberspace.
9King v. Dominion Engineering Co. Ltd., [1951]
2 STC 67 (PC).
10State of Bombay v. The United
Motors (India) Ltd, [1953] 4 STC 133 (SC).
CONCLUSION.
E-commerce,
as a technology-driven commercial activity, presents challenges in terms of
supervision and taxation. The cross-border nature of E-commerce further
complicates the matter. Taxation has traditionally been a function of individual
countries, limited by territorial boundaries and the constitution of each
country. In the case of E-commerce, where there is no specific territory associated
with any sovereignty, formulating a universal tax formula becomes difficult without
an International Charter. An International Charter could facilitate the exchange
of information between countries, aiding tax authorities in their efforts.
Coordination among countries can be achieved through information exchange
agreements, as demonstrated by the Organization for Economic Co-operation and
Development (OECD).
To address tax evasion in cyberspace,
the theory of physical presence has been proposed7. According to
this theory, the country where the seller or service provider has a physical
presence is responsible for taxing their sales, services, or income. While this
could serve as a universal rule, challenges arise when considering the concept
of deemed physical presence. A uniform international charter may be necessary
to address these issues, particularly for developing and third-world countries.
The concept of BIT-Tax (Bit Tax)8
has emerged as a novel approach to combat concerns regarding tax erosion. It
involves taxing internet usage based on volume and implementing a turnover tax
on interactive digital traffic, regardless of the type of content. Collecting
these taxes through internet
service providers offers
convenience for tax authorities. In countries like India, where the tax structure is complex, embracing the Goods and Service Tax (GST) could simplify taxation,
with BIT tax becoming a part of GST as it
is levied on internet services.
The scrutiny of income generation, e-services, or e-commerce sales by tax
authorities is a crucial aspect. Determining the jurisdictional point of
cyberspace transactions is a matter that requires examination. While tax
authorities initially paid little attention to the potential tax erosion caused
by e-commerce, they are now recognizing the importance of addressing this issue.
11Quill v. North Dakotta,
504 U.S. 298 (1992)
12BIT 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 actualweb-surfing or usage.
Article Information
E-TAXATION ISSUE IN CYBERSPACE
Authors: MINSHI SINHA
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/04/01
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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- License CC 4.0
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