Fundamental principles of International Taxation prescribe for two kinds of taxation – residence based
and source based transaction. The former is where the country of residence or domicile of the person
(including juristic person) has the jurisdiction and power to levy tax on transactions between the parties to
the transaction. The latter, source based or territory based, is a form of taxation where the transaction is
taxed based upon its origin country, irrespective of the residence of the parties. Countries often apply
these principles differently on residents and non-residents, on the basis of determining factors such as
permanent establishment of the business, place where the business works for gain or exercises substantial
control, point of origin of contract, or point of sale, product classification etc.
However, with the advent of globalized networks such as the internet and other e-communication
systems, electronic transactions between parties to a contract, who reside at two ends of the globe, is
facilitated and conducted with ease as the day passes. Since such cross borders transactions are
undertaken on virtual networks, it becomes increasingly complex to apply the conventional principles of
taxation on these transactions. Income is generated even without a brick and mortar structure or physical
presence of the transacting entities, thereby making it difficult to identify where the source of the
transaction is, or where the incomes is gained. Furthermore, since each nation has its own form of
taxation, there exists a certain level of disparity between countries with regard to the tax structure, nature
of transaction to be taxed, the authority levying tax, who the tax is levied on (nationals or non – nationals,
residents or non-residents etc), adjudicatory body to determine disputes, which can often result in issues
of double taxation or no taxation. Due to the inconsistency in tax structures and lack of set standards to
determine taxation issues for virtual transactions, governments lose out on huge revenues.
An interesting take on the controversy regarding taxation of e-commerce is whether it should be taxable at
all. Anti-taxation believers advocate that e-commerce has reduced the need for usage of the State’s
material resources, which negates the entire purpose of taxation, which a form of revenue to the State for
usage of its resources. They also argue that even without a taxing mechanism, e-commerce generates
substantial employment opportunities, benefits a wider number of manufacturers, higher productivity and
therefore, leads to general growth of the economy. On the other hand, pro-taxation believers opine that
similarly situated vendors or sellers should be taxed similarly. Therefore, for instance, both – a vendor
who has a brick and mortar structure of business and a virtual vendor should be taxed similarly, since the
costs they would incur, although from different sources, would cumulate to the same. Further, a tax
regime which completely exempts e-commerce transactions would result in colossal losses to the
government. The middle ground for the debate as proposed by several others is modify the existing tax
regime to include internet and e-transactions under the ambit of conventional tax regime, while providing
for exemptions to allow the e-commerce market to flourish.

By Bhavna B, School of Law,
Christ University Bangalore.

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