Assume a buyer in Pakistan downloads software from the Internet for a 30-day trial. If he likes the software, he submits his credit card information and receives an authorization code that allows him unrestricted use of the software. Assume the software in this case was developed by a company in UK, and is available for download from servers located in fifteen countries. The buyer in this case happened to download the software from a server located in Singapore. The buyer found the software while browsing the Internet using Internet Explorer, a software program produced by Microsoft. The buyer gained access to the Internet using an Internet service provider (ISP) based in Lahore. Is there a taxable transaction? If so, what was sold and where was it sold? When is the transaction taxable? Who has the right to tax the transaction? The questions presented by this example are not conveniently answered by existing tax laws.

The basic legal Issues of E-Commerce Taxation Following are issues described below, which I perceive, are basic issues, which are hampering the collection of e-commerce taxation.

I. Non-Existent and inadequate Substantive laws Following are substantive laws, which have failed to meet needs of technological advancement for e-commerce taxation.

1. Tax Laws There is no as legislative provisions are available either in sale Tax or in Central Excise duties for collection of taxation of transaction conducted in Internet. The Legislation of any kind with having attempt to Levy Tax without requisite Tax System, which could combat technological advancement, would be of no avail.

Currently the e-commerce taxation administration requires efficient Internet Network system to Monitor the Encryption database, configure IP address and facility to hack the system for getting access to record keeping. 2. Internet and ISP Laws There is no Internet and ISP laws have yet legislated which could regulate the cyberspace. We need to regulate Internet contents, either these Submit forms for conducting E-Commerce or of intellectual property rights. Further more we need Internet Services provider (ISP) laws to regulate to create Hacking rights and to have access to Database for the purpose of levying Taxes.

What types of Internet and ISP laws should be implemented in Pakistan for the purpose of efficient collection of e-commerce taxation in Pakistan, it is still big question mark for the government? 3. Digital Signature Laws Article of 78-A of Qunun-e-Shahadat, proof of Electronic signature has been amended by promulgation Electronic Transaction Ordinance 2002, but complex issues can not resolved by amendment in one article, we need to have detail Digital Signature laws for adjudication of e-commerce taxation.

All transaction in e-commerce is made by acceptance of terms and conditions by Client imposed by Website operators by pressing acceptance button, by doing that he undergoes legal obligation by accepting terms and conditions imposed on him. The aim of Digital signature laws to regulate website terms and conditions of contract and to impose restrict on any terms which are void or illegal according to the contract laws. Further more the by SIGN IN to website arise contractual obligation both parties which should be backed by prevailing substantive and procedural laws, unless and until Digital Signature are not legalized, it would be out of question to impose any e-commerce tax.

4. Security and Privacy Laws The cyber crimes cannot be control without having appropriate security checks and to protect these networks from intruder, we need to have security laws. Security and Privacy laws regulate the powers of Network operators to maintain level of security and privacy of database and also allowing authorized hacking on part of Tax Officers.

For Smooth running of system we need to promulgate security and tax laws so that the authorized hacking be legalized.

II. Qunun-e-Shahadat Although the Electronic transaction ordinance 20002 has made amendments in Qunun-e-Shahadat to meet basic criteria of evidence regarding electronic transaction like Article 2 regarding admission; Article 49-A acceptance of relevance of information generated by automated information system; Article 59 Expert opinion of information technology officer; Article 73 regarding acceptance of primary evidence of any information received and transmitted in computer based form out of automatic generated transaction and also Article 78-A prove of digital signature.

Beside these amendment the article 184 of Qunun-e-Shahadat has also widened the definition evidence to include scientific devices a legal evidence produced thereby modern devices, although the definition of modern device has been extended to video films but no adjudication has been made regarding for extension of evidential definition to include e-commerce transaction.

Despite these amendments it different to suppose, it rather these will lead to smooth running of legal system. How the automated generated information will be place before court, either server side or client side response? Who is going to be an Expert? Rather the power of expert has been defined; rather he has been granted the right to hack the security rights of system? What is a basic standard and criteria to be an expert? III. Procedural Laws' flaws Electronic Transaction ordinance 2002 has settled the matter that every court not below the session has right to trial the suit but jurisdictional issues is too complicated in electronic transaction. The physical establishment business is a often regarded as criterion for imposition of e-commerce but what about the e-commerce transaction which has no location of transaction? The Procedure regarding the summons to defendant whose presence is not known, rather Civil Procedure Code of 1908, recognizes any such summons, which is communicated through electronic means, here we need to make amendment Order V and also orders related with Order IX, XI, XII, XII, XVI, XXI etc to adjudicate the procedural deficiency to meet the requirement of electronic commerce.

IV. Jurisdiction issues The section 3 of sale Tax Act described the jurisdiction parameter for imposition of the sale tax, but the principle enunciated in said section would not be applicable, as sale don't fulfill the type of sale conducted in e-commerce. There emerge following jurisdictional issues, and before imposing sale tax we must keep following issues under consideration.

1. Place of Establishment The place of establishment of business could be a criterion for imposition of tax. If the home based company operating her business on net, Central Board of Revenues should impose tax as the place of establishment of business in Pakistan irrespective of fact that the website e-commerce transaction has taken place out side of Pakistan.

If the sale is of Multinational companies, the part of sale, which is transported in Pakistan, could be subject to taxation, and then the jurisdiction provision of section 3 of Sale Tax can be invoked.

If scattered individuals conduct the e-commerce transaction without having any locus point of establishment or run across globe, then right to impose tax could be exercised on those individual who reside within the jurisdiction Pakistan.

2. Data Encryption Place Where the encryption of data has taken place, the right to impose tax to be vested there, but this legal argument is not supported by e-commerce jurists as it could lead to evasion of taxation by giving the indignant companies to upload their website outside of Pakistan.

V. Remote Operation of Web Server There is another crucial issue, which hampers the smooth running of the system, how to regulate the remote operation of web server whose establishment is not within the jurisdiction of the Pakistan? How the Tax machinery can get access to remote Web Server for monitoring of database of transaction overruling the security and privacy issues of system? The tax machinery suppose have legal right to get access but these are not possible without signing international tax treaties, unless and until we don't have security and privacy laws, we can not negotiate other countries for getting authorized system hacking.

VI. Intangible Record The record which generated by electronic commerce is intangible record unless it is required to be produced in form of paper based form, this issues make the tax collection difficult as the record can be transmitted to any web server located any where in this world within fraction of times. For effective tax collect we need to constant vigilance of record with authorized system hacking and also making compulsory requirement of maintenance database in paper-based form.

The registration of ISP, Web hosting sites and web sites Here we need to have registration of Internet Service provider and Hosting sight site, and the principle of the registration should be the home based establishment of individual, companies etc. but the issues will arise of ISP and web hosting site that have also their physical establishment and Web Hosting in or out side of Pakistan.

The establishment of Surveillance Authority For controlling tax evasion, we need to establish Surveillance authority for constant monitoring of the website' database by giving power of system hacking. Unless and until the surveillance authority is not established, it would not easy to verify the record keeping requirement of sellers and tax compliance of the website whom database is not hosted in Pakistan. Furthermore while defining the power the surveillance authority we to need to promulgate security and privacy laws to limit the power of authorized system hacking by surveillance authority.

There is a need for appropriate co-ordination of the surveillance authority with Tax officer for smooth running of Tax machinery.

Record-Keeping Requirements The electronic recording keeping requirement and its issues runs as under.

I. Electronic Record Keeping Under section 22 of Sales Tax Act, it is required that all receipt of sale of good record be maintained by seller, the record keeping of the database generated by e-commerce transaction requires different legal procedure for acceptance of authenticated document as evidence. Once the e-commerce transaction has been taken place and record of purchase of good has been transmitted to database. The electronic record should be transformed into paper-based form for as an evidence of transaction.

The surveillance authority should be given power to authenticate the paper record of database, and to maintain constant vigilance by using their power to hack the system.

II. Retention of Record The record should be required to maintained by the tax payee in appropriate manner either in electronic form or in the paper based form, with detail of times, place, name of the purchaser in prescribed form, but the manipulation database in computer based form is too easy to be tampered by computer software. Here we need to give comprehensive policy to regulate the computer software.

III. Access to Electronic Record Keeping and Authorized Hacking The tax and surveillance authority should be empower to hack any system and its database for the purpose of getting direct access to the database of the website. The authorized hacking arises legal issues, which require legislation of database and security laws to adjudicate the issues of limitation of powers of hacking; contractual obligation of Web Server for maintenance of security and privacy of websites and their database.

Secondly, the authorization of the hacking of global website server, CBR need to sign international treaties for getting permission for hacking of network to get access to database of transaction.

Thirdly, how the discretionary power of the tax payee surveillance authority can be checked, what remedies the tax payee have against a minute recording of evidence of seller' record of transaction, rather the authorized hacking of the Networking systems can be accepted as primary or secondary document? Rather the Electronic hacking can be legalized for purpose of collection of E-commerce taxation, what will be the limit of hacking? And how to give the hacking the legal backing? We need to statutory provision to resolve this legal issue.

Tax Compliance Tax compliance e-commerce is also tricky problem, which is exposed to following considerations.

I. Tax Compliance of Registered and non-registered Websites The registered and non-registered Website should be subject to tax compliance to rate prescribed by CBR by both registered and non-registered with incentive for registered websites.

II. Tax Compliance of Foreign Companies hosting their Website in Pakistan Jurisdiction There is another very important issue regarding the hosting of the Foreign Company Website in Pakistan, rather the CBR can impose tax as the data Encryption has been taken place within the jurisdiction of the Pakistan. Unless we don't have any ISP and Web Server laws, we could not in position to impose Sale Tax, for resolving this problem we need to sign international tax treaties. The section 3 of the Sales Tax Act that authorizes the CBR to levy all tax duties on sale conducted in within the jurisdiction of the Pakistan. But scope of imposition of sales tax will not be justified, if the buyer and seller are not residing within Jurisdiction of Pakistan.

III. Tax Compliance of Pakistan based Companies hosting their Website outside of Pakistan Jurisdiction The scope of imposition of sales Tax cannot be negated on the fact the data encryption as well as the hosting of the website is not located within the jurisdiction of Pakistan. The presence of establishment must be the primary principle of imposition of Tax. But legislative rule must clear the fact that the purchaser should be residing within the jurisdiction of the Pakistan, otherwise any transaction which has been taken place would be subject to dual taxation in form of sale tax and Custom duties.

These principles are not regarded as final in determining the tax compliance issues in ever changing e-commerce technological world.

 

 

The writer is an advocate of High Court and practicing immigration and corporate laws in Pakistan since September 2001. He is a self employed and pioneer in research on electronic commerce taxation in Pakistan. His articles were published widely in the critical areas of cyber crimes, electronic commerce, e-taxation and various other topics. He wrote LL.M thesis on titled "Legislation of electronic commerce taxation in Pakistan" in which he provided comprehensive legal proposals for statutory reconstruction of tax laws for purpose of imposition of taxation on e-business in Pakistan. Currently he is conducting is research on topic 'Electronic commerce taxation: emerging legal issues of digital evidence'.Author can be contacted by This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

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