We live in a world where we exchange materials with each other on a daily basis. At times, this exchange is in order to gain some monetary return or at times it is borrowing with a future promise to pay or at times it is favour when we get the thing without any cost, maybe as a gift too. Now, let us confine ourselves to the monetary aspect of exchange, where we buy goods and services in exchange of monetary returns. Whenever we buy a particular item from the shop or supermarket or any other business place,
there is something called as ‘tax’ imposed on the item (except certain tax-free goods). Now what is this tax? Why is this so important? And most importantly, why is there a need to talk about taxation in cyberspace?
A compulsory contribution to state revenue, levied by the government on workers
Tax could be defined as, “a compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions.” The taxes are important, because it is due to these taxes that the citizens have to pay in order to ensure development and strengthening of infrastructure. The taxes are not just taken from the citizens randomly. Rather, a taxation system is structured in order to garner taxes from the citizens and the taxation system is not a uniform thing,
it is a subjective system, which varies from country to country.
Now to answer the third question, the readers have to go through the entire article,
as the entire article has been based on that. To give a brief,
it is essential to have a taxation system over cyberspace because the 21st century has witnessed an explosion in the E-commerce system. A person sitting in India can very easily get things from Australia, thanks to E-commerce. Now the issue comes when the item travels to a lot of places and countries to take form of a finished product.
So essentially the problem arrives when:
- Identification of transaction, and if so, then under which jurisdiction?
- To assess whether tax should be paid and if it has to be paid, then how it should be applied?
To answer these questions, and to cover the Indian aspect of it, let us start from the basics.
What is income and what are its characteristics?
Income in its most precise terms means returns in terms of monetary value, received on a regular (here, from the time stipulated) basis in exchange of work done or investments done. Now income is considered as a backbone of any household. People are often differentiated on the basis of income into mainly three classes: High Income class,
Middle income class and Lower class. Now, we won’t be concerned with the social or the moral values per se in this particular article, rather we would talk on the basis of economic background. There is something known as ‘Income Tax’ taken by the government,
where the government has made tax slabs for the people who earn and has decided the total percentage of tax they have to pay according to their income.
Now, it is essential that we talk about the characteristics of income, how it should be and what it is composed of.
They are as follows:
- Income must be of monetary value or the worth of monetary value.
- It always comes in the pocket of the person/individual.
- Income could be in form of any asset that has monetary value.
- As mentioned above, an income is regular in nature. Regular here implies that it should be periodic in nature, it should come from time to time.
- Income should be legal in nature. It shouldn’t be garnered from any illegal activity/activities.
In simple words, indirect tax(es) refer to those taxes that is transferred from one individual to another individual/entity. In business terms, this indirect tax is imposed on the manufacturer who then passes this tax on to the next individual entity till it finally reaches the ultimate consumer or customer. This indirect tax is meagre in monetary terms and is unavoidable when the individual desires to purchase a particular product. It doesn’t really appear on the product,
however it is issued and is made visible when the purchase receipt of the product is obtained by the customer.
There are various types of indirect taxes, like sales tax, excise tax, custom tax et cetera. However,
after the imposition of Goods and Service Tax (GST) in India, all these taxes have been merged together to be formed as one. The indirect taxation system enjoys a certain benefit over the direct taxation system. That being, the indirect tax doesn’t involve long-list of filings and heavy procedures. Rather it is paid on the spot.
Now, when we talk of indirect taxes, it is necessary that the readers understand what used to be the tax system before the imposition of GST in India. We are going to talk about two of the taxes that used to be in India
but are still existent in certain parts of the world. However,
we are going to talk about them in brief and not in a detailed format as they have now been replaced by the GST. They are:
Central Sales Tax (CST):
Central sales tax refers to any and every kind of tax levied on the sale of goods and services only when the sale of goods and service(es) has been carried out inter-state. That means, if there has been sale of goods and services from one state to another,
then it would come under the purview of Central Sales Tax or the CST. However, one must note that CST is restrict to inter-state purchases and transactions and not inter-country transactions.
In India, before the enactment of GST, the CST was govern under the Central Sales Tax of 1956. Sales Tax in India falls under the ambit of Central Sales Tax Act, 1956, which extends to the whole of India and defines the rules and regulations guiding sales tax. This Act was introduced in the Sixth Constitutional Amendment and brought the taxes on sale/purchase of goods in inter-state trade under the purview of the legislative jurisdiction of Parliament. This act came into force in 1957 and
forms the backbone for Central Sales Tax in India, containing various provisions for the same.
This Act mentions the definitions of inter-state trade, situations where CST is applicable, penalties involved,
important goods for interstate trade, trade restrictions, appeals and any other information which might be relevant.
Value Added Tax (VAT):
Value Added Tax or VAT is a type of consumption tax. It essentially means that tax has to be pay in each step of the manufacture of any goods and services right from the raw materials to the sale of the goods to the ultimate consumer. It is a type of tax which is collect by the manufacturer and then pay to the government and
so on, forming an essential part of the economy by strengthening the GDP of the nation.
Again, before the enactment of the GST, VAT was levied by the government of India under four heads:
Nil, 1%, 4%-5% and lastly the general. It was advocated that VAT is actually a beneficial taxation system when it comes to country like India
as it is believe that the rich class often exploits the income and VAT ensure that the tax is pay in each part of the supply chain till it reaches the ultimate customer.
International Approach to Taxation in Cyberspace:
When we talk of the taxation system with respect to Cyberspace, essentially the possibility of the individual taxpayer ends and the companies, especially the Multi-National Companies (MNCs) come into the picture. Usually, the companies are tax on the basis of the taxation system
at the place where the central management of the company is based.
Whereas, when we speak of the MNCs, they are tax on the basis of the place of income generate. That is, if there is an MNC which has its head office or the main office in Australia and has a branch in India, then it would be tax under the Indian Taxation system and not according to the Australian Taxation system when it comes to its establishment in India. The process of double taxes levied by both the residence country and
the country where the branch is present is know as the system of double taxation and
is usually avoid when it comes to any and every kind of tax treaties present between two or more countries.
OECD Tax Convention
Under the tax treaties based on OECD Tax Convention,
an enterprise providing services abroad is taxable in the country where it conducts business only if it has PE there. For most tax treaty purposes, a ‘PE’ is a “fixed place of business through which an enterprise carries on business. A PE presupposes ‘a fixed place of business’ (the basic rule of PE) which may include premises, facilities or installations. The characteristic ‘fixed’ demands a specific fixed long-term connection between the place of business and a specific part of the earth’s surface.
Secondly, if the services provide are the part of a construction or installation project that lasts for more than a particular period of time,
a PE may be constitute under article 5(3), i.e., construction PE. The third element of PE is article 5(5) and (6) under which an ‘Agency PE’ may be constituted. This is the case if a provider of services in a country has a dependant agent
there who involves his principal in business by regularly concluding contracts on behalf of the principal. Typically, however, tax treaties exclude from the definition of a fixed place of business any offices and
facilities that are used merely for promotional activities or for the storage, display or delivery of goods and facilities.
Indian Approach to Taxation in Cyberspace:
When we come to Indian Taxation system, then nobody is alien to the fact that the jurisdiction and the legalities come under direct question as Internet in itself is pretty boundary less and cannot be contain. In order to facilitate and
move the taxation system in the nation, the search for permanent establishments becomes one of the prime issues
as the people who wish to evade taxation norms might shift their server(s) from one place to another place. In order to further simplify the taxation system for E-commerce,
the IT Act of 2000 was also put into picture as it was mean to facilitate the E-commerce and E-contracts, as such.
Prologue of the Information Technology Act
The prologue of the Information Technology Act reads, “An Act to provide legal recognition for the transactions carried out by means of electronic data interchange and other means of electronic communication commonly referred to as Electronic Commerce,
which involve the use alternatives to paper based methods of communication and storage of Information, to facilitate electronic filing of documents with the government agencies and
further to amend Indian Penal Code, Indian Evidence Act, 1872,
The Bankers Book Evidence Act and the Reserve Bank of India Act, 1934and for the matter connect therewith or incidental thereto.” Taxing the Internet is the most debated and complicate process, as the E-Commerce is different from the traditional commerce. E- Commerce has no boundaries across the countries,
as it is a tangible process and is more prone for the Double Taxation among two different countries
i.e. in the host country & the country where it operates or functions.
Equalization levy is a type of direct tax, i.e. a tax which has to be pay on the income accrue from one Business to another Business which is not situate within the boundaries of our nation.
Over the last decade, Information Technology has gone through an exponential expansion phase in India and globally. This has led to an increase in the supply and procurement of digital services. Consequently, this has given rise to various new business models,
where there is a heavy reliance on digital and telecommunication networks.
As a result, the new business models have come with a set of new tax challenges in terms of nexus,
characterization and valuation of data and user contribution. The combination of inadequacy of physical presence based nexus rules in the existing tax treaties and the possibility of taxing such payments as royalty or
fee for technical services creates a fertile ground for tax disputes.
To bring in clarity in this regard,
the government introduced vide Budget 2016, the equalisation levy to give effect to one of the recommendations of the BEPS (Base Erosion and Profit Shifting) Action Plan.
When it comes to taxing the Internet, it becomes pretty impossible to regulate the dynamics of such ever-changing world of E-commerce as such. However, with a lot of lacunas,
there is a need of the system that not only ensures that the taxing system overcomes the challenges in the country,
but also proves as an example for the entire world.