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Monday, Feb 04, 2002

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E-com deals may be kept out of I-T net

Hema Ramakrishnan


THE Budget may have some good news for the information technology sector as e-commerce transactions are set to be kept out of the income tax net in 2002-03. The Finance Ministry had taken the view that it would not be prudent to bring e-commerce transactions under the direct tax net in the absence of consensus among all players, said a senior official.

Although January 31 was set as the deadline for submitting suggestions on the report of the high-powered committee on electronic commerce and taxation, the Central Board of Direct Taxes (CBDT) has decided to keep the channels of communications open for some more time.

"The deadline is really not sacrosanct as we are still open to receiving suggestions on the report,'' said a senior Finance Ministry official. Since the Ministry would require some time to study the suggestions, it is not in favour of pushing through the proposal to tax e-commerce transactions.

The recommendation to subject income of content providers, service providers and all other persons engaged in e-commerce to the same taxation as traditional commerce was made by a high-powered panel on e-commerce taxation. This can be done without amending the existing provisions of the Income-Tax Act.

However, some tax professionals have opposed the proposal, saying that it would be counter-productive as e-commerce is still in a nascent stage. In fact, in its Budget wish list for 2002-03, the National Association of Software and Services Companies (Nasscom) had reiterated its demand for a five-year moratorium on tax on e-commerce.

E-commerce transactions were estimated to touch $ 255.3 million in 2001 i.e. 0.05 per cent of the GDP, significantly lower than in China, Australia, South Korea and Hong Kong. The B2B segment accounts for roughly 90 per cent of the total e-commerce in India.

The Kanwarjit Singh panel on e-commerce also recommended abandoning the concept of permanent establishment (PE), saying that a serious attempt should be made within the OECD or UN to find an alternative to this concept.

The OECD, on the other hand, is of the view that server at the disposal of an enterprise and hosting its Web site could constitute a PE, if it is kept at a fixed place for a sufficient period of time and performs core business of the enterprise.

As an alternate to PE, the Kanwarjit panel had supported the "base erosion'' approach of taxation of income streams in source countries. This suggestion has, however, been opposed by some tax experts who reckon that it is in direct contradiction to international trade.

Since many of these contentious issues are being debated the world over, the Indian Government would prefer to ascertain views of all players before bringing e-commerce transactions under the ambit of income-tax.

A decision has already been taken at the Doha Ministerial round, last year, to extend the moratorium on placing additional customs duty on e-commerce by two more years.

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