THE NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

MCLIS

RESEARCH METHODOLOGY

PROJECT ASSIGNMENT ON

TAXATION IN CYBERSPACE

UNDER THE SUPERVISION OF

PROF. ABHINAV GUPTA

SUBMITTED BY

SUDEEPTI PANDEY
ROLL NO.

2021MCLIS18
 DECLARATION

I, Sudeepti Pandey hereby declare that this project entitled ‘Taxation in Cyberspace’ is the
outcome of the doctrinal research conducted by me as a part to accomplish my academic
requirement under the MCLIS programme at National Law Institute University, Bhopal under
the supervision and guidance of Prof. Abhinav Gupta.

This project is my original work except for the help taken from such authorities and references
as have been referred at the respective places for which necessary acknowledgement have been
tendered.

I further declare that this project has not been submitted either in part or whole for any degree
or diploma at any other University or Institution.

Date: 15 November 2021

Place: Pimpri

Sudeepti Pandey

202MCLIS18

Master of Cyber Law and Information Security

National Law Institute University, Bhopal

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 ACKNOWLEDGEMENT

I express my sincere gratitude to Prof. Abhinav Gupta and owe my regards to her/him for
giving me the golden opportunity to carry out the project entitled “Taxation in Cyberspace”
under his guidance. This project would not have been completed without his invaluable support
and thought-provoking comments.

I also extend my gratitude to my friends for their feedback and co-operation. I am indebted to
all those who obliged me while doing the research work, and their valuable contributions have
played a vital role in completing the project.

I am grateful to my forever encouraging and always enthusiastic family and siblings. As they
are always keen to know what I am doing and how I am proceeding. I am also grateful to my
family, who have provided me with moral emotional support in my life and for the unrelenting
support and keeping my spirits high throughout this project.

Though I have tried my best, at the same time, I know that learning is an ever-going process, so I would
like to have all the valuable suggestions for the future.

With profound gratitude.

With profound gratitude.

DATE: 15 November 2021
PLACE: Pimpri
SUDEEPTI PANDEY
2021MCLIS18
MCLIS
NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

III
 Table of Contents

CHAPTER-I INTRODUCTION......................................................................................................................3
INTRODUCTION....................................................................................................................................3
REVIEW OF LITERATURE.......................................................................................................................3
STATEMENT OF PROBLEM....................................................................................................................4
RESEARCH OBJECTIVE...........................................................................................................................4
HYPOTHESIS.........................................................................................................................................4
RESEARCH QUESTIONS.........................................................................................................................4
RESEARCH METHODOLOGY..................................................................................................................4
LIMITATION AND SCOPE.......................................................................................................................5
CHAPTER II TAXATION IN CYBERSPACE.....................................................................................................6
CHAPTER III ISSUES IN TAXING CYBERSPACE............................................................................................7
CHAPTER IV: ARGUMENTS FOR AND AGAINST E-TAXATION..................................................................10
CHAPTER V: CONCLUSION AND SUGGESTION........................................................................................12
CONCLUSION:.....................................................................................................................................12
SUGGESTION:.....................................................................................................................................12
SCOPE FOR FUTURE RESEARCH..........................................................................................................13

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 ABSTRACT

Buying and selling online has generated huge income on the Internet. Therefore, taxing the
cyberspace involving e-transactions is an important aspect. However, there are various issues
associated with taxation of cyberspace such as, taxation of e-commerce transactions, goods and
services distinction, business connection, characterisation of income, identification of value of
e-commerce transaction, identification of value of e-commerce transaction, identification of
parties, validity of contract, etc. This project discusses these problems and justifies why taxing
the cyberspace should be mandatory.

Keywords: E-commerce, taxation, the Internet, cyberspace

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 CHAPTER-I INTRODUCTION

INTRODUCTION

As technology kept growing it started accumulating the traits of an e-market. Today it

encompasses and hosts various e-commerce platforms creating a cross-border digital economy.
E-commerce transactions save time of consumers and are more cost effective hence, a popular
choice among them. While these are the benefits accruing from online transactions,
government is concerned about the nature of taxation rules that become applicable to such
transactions. Taxation in cyberspace is a novel concept where the medium of collecting taxes
also changes and therefore, a novel method for taxation is to be adopted.

The absence of a physical place in e-transactions increases the complexity of imposing tax on
the business. Because of lack of tangibility and lack of boundaries in digital services, it is
difficult to set a frame for applying taxation rules to the digital economy. Moreover, as e-
commerce transactions are increasing, government is losing revenue due to difficulty for tax
authorities to identify legal person upon whom tax can be imposed. A supplier in cyberspace
can take up multiple identities which concerns the taxation authorities. In the present project
the issues relating to taxation of digital services is being discussed.

REVIEW OF LITERATURE

Books referred:

• K Vaitheeswaran- Taxation of Digital Economy

In this book the author has discussed the basics of taxation in digital economy. It
provides details of functioning and various aspects encompassing e-commerce. The
author brings out tax challenges by providing an in-depth analysis of how the revenue
generation activity takes place across the jurisdictions, the associated issue of
establishing a permanent establishment and the relevance of a virtual and digital
permanent establishment in the context of taxing rights.

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STATEMENT OF PROBLEM

E-commerce activities generate a number of transactions and consequently a huge income to

the suppliers. This generation of income on cyberspace cannot be ignored and must be brought
within the ambit of taxation, following the general rule of taxing every income generated.

RESEARCH OBJECTIVE

General Objective:

To study what is taxation in cyberspace.

To know the various issues in taxing the e-commerce transactions.

Specific Objectives:

To know whether cyberspace must be taxed or not.

HYPOTHESIS

Taxation of cyberspace should be mandatory.

RESEARCH QUESTIONS

Q1 What is taxation in cyberspace?

Q2 What are the issues in taxing the cyberspace?

Q3 What are the arguments for and against taxation of cyberspace?

RESEARCH METHODOLOGY

The research methodology used in this research is doctrinal research. The research uses
secondary sources of data collection to carry out the research objectives. Literature review has
been extensively carried out in order to make a comprehensive presentation. Various articles

4
and reports across different websites have been used in order to develop a detailed
understanding of the subject and obtain recent data on the topic.

LIMITATION AND SCOPE

 The research is restricted to taxation in e-commerce.

 The research is based on only secondary sources of information.

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 CHAPTER II TAXATION IN CYBERSPACE

With improving technologies cyberspace has evolved into a market for online consumers and
e-commerce platforms emerged. Tax is a mandatory imposition by the sovereign without any
guarantee of special benefits1. Considering the enormous scope for commercial activities,
taxing the digital services can generate public revenue. While levying a tax, the Government
brings in measures to regulate consumption of a commodity or business commodity or
accumulation of wealth in a hand of few. It is of value that the economically similar
transactions must be taxed similarly. Thus, taxation principles that apply in conventional
transactions must be applied with similar significance to the cross-border transactions as well
occurring on cyberspace.

Organisation for Economic Co-operation and Development enunciated the principles of

neutrality, efficiency, certainty, simplicity, effectiveness, fairness and flexibility for taxing
digital transactions. E-commerce taxation done contrary to these general principles would
result into a competitive disadvantage to the e-commerce industry.

Permanent Establishment:

Organisation for Economic Co-operation and Development has defined permanent

establishment as “a fixed place of business through which business of an enterprise is wholly
or partly carried on.” On similar basis Income Tax Act, 1961 defines the term permanent
establishment. Permanent establishment includes factory, mine, branch office, etc. In domestic
law, the term is identified as business connection. All income accruing or arising whether
directly or indirectly through or from any b usiness connection in India is deemed to accrue or
arise in India2.

Source and Residence Based Taxation Principles:

Source based taxation system means that source of income arises from where the business is
carried out. Residence based taxation system means that all legal entities and individuals are
subjected to tax in the place they are resident.

1
Dr. Pradeep K.P., ‘Key Issues on Cyberspace Taxation’ (LAWYERSCLUBINDIA, 24 February 2011)
<https://www.lawyersclubindia.com/articles/key-issues-on-cyberspace-taxation-3542.asp> accessed 15
November 2016.
2
K Vaitheeswaran, Taxation of Digital Economy (Oak Bridge, 2020).

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 CHAPTER III ISSUES IN TAXING CYBERSPACE

There exist certain issues in e-taxation such as the entire transaction gets completed across
borders, finding out the point of commencement and end of a transaction and identification of a
permanent establishment for taxation of services or products3.

 Taxation of e-commerce transactions:

Identification of permanent establishment is a major issue in taxation of e-commerce

transactions. It is difficult to determine the source from where the income arises in
online transactions. It is difficult to tax services provided online as the individual might
be residing in multiple jurisdictions. The user deriving the services cannot be identified
by using the domain name which only states the person responsible for maintaining it.

 The Goods v Services distinction:

Out of the several goods being sold in offline markets are also available in online
markets. Different goods and services are taxed differently and also it needs to be
distinguished whether a particular product is a good or service. The key issue that arises
is, it is difficult to identify and categorise products into goods and services online. This
is a key issue in taxing e-commerce transactions. Products available online such as
digitized images, software, databases, films, etc. also need to be identified for taxation
purposes. A service performed by foreign company outside the country is difficult to be
taxed.

 Business Connection:

For taxing a particular transaction establishment as well as identification of a business

connection is important. E-commerce transactions are spread across jurisdictions
having multiple consumers, that is why it becomes difficult to identify the source from
where the income is generated and hence taxing them. An issue of concern which is not
covered under the Income Tax Act, 1961 is whether owner of a computer server who
lets a company host its website on the server be said of having a business connection
with the country.

3
‘Taxation of E Commerce: A Theoretical Perspective’ (RACOLBLEGAL, 16 October 2016)
<http://racolblegal.com/taxation-of-e-commerce-a-theoretical-perspective/> accessed 15 November 2021.

7
 Characterisation of Income:

For an income to be taxed characterisation of the income generated is important. It is

important not only from the point of taxation of resident assesses but also from the
point of view of taxation of transnational entities 4. Different sets of income are taxed
differently. The market being overflown with the variety of goods and services, it is
difficult to device different tax treatments for each. Constant upgradation in technology
also makes categorization of income difficult like supply of software solutions would
amount to sale of goods or services.

 Identification of value of e-commerce transaction:

E-commerce offers a range of services whose determination of value is a difficult task

on which taxes are levied. Whatever the assessee determines as his tax liability, he will
be assessed on the same value. This can be utilised by assessee as an opportunity to
evade taxes. It is difficult to identify value in case of professional or personalized
services. In this situation the taxman remains reliable on the information provided by
the assessee and compare it with the similar available services.

 Identification of Parties:

In transactions on the Internet, it is difficult to identify the parties involved. It requires

highly technical solutions like decoding of protocol addresses 5. Due to the absence of
physical presence at the time of entering the contract, the legitimacy and capacity of
either of the parties to enter into contract becomes questionable. Sometimes it may
happen a person with false identity enters a contract and personal information is
disclosed to him, in such scenario establishment of identity comes into danger and
information disclosed can be used against such person.

 Validity of Contract:

In e-contracts issues may arise with respect to the identity of parties and also about
nature of acceptance as both parties are not aware of the other’s identities and

4
‘Taxation of E Commerce: A Theoretical Perspective’ (RACOLBLEGAL, 16 October 2016)
<http://racolblegal.com/taxation-of-e-commerce-a-theoretical-perspective/> accessed 15 November 2021.
5
Dr. Pradeep K.P., ‘Key Issues on Cyberspace Taxation’ (LAWYERSCLUBINDIA, 24 February 2011)
<https://www.lawyersclubindia.com/articles/key-issues-on-cyberspace-taxation-3542.asp> accessed 15
November 2021.

8
 consideration. For example, while downloading a software from a website the seller
and the buyer might not be aware of each other’s identities, yet amounting to a contract.

A tax-free cyberspace is a dream and cannot be realised. Due to the range of products and
services offered via the Internet, absence of identification of parties to contract, distinguishing
goods and services, etc. it is difficult to frame a single rule which may fit everywhere. It is
imperative for all the stakeholders to come together to ensure a methodology which may find a
balanced solution for the needs of all.

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 CHAPTER IV: ARGUMENTS FOR AND AGAINST E-
TAXATION

ARGUMENTS IN FAVOUR OF E-TAXATION:

 Tax Neutrality:
E-taxation is based on the principle that all businesses must be taxed
irrespective of the mode in which they are conducting the business. If e-
commerce transactions are taxed similar to conventional businesses, then these
businesses will be at a competitive disadvantage. On the other hand, if e-
commerce transactions are not taxed at all, it will again be a disadvantage to the
conventional businesses as their products will be sold at relatively higher costs.
If the e-commerce transactions are taxed, the burden of tax will pass to the low-
income group consumers who will have to bear higher tax liability.

 Tax-rates:

If different rates of tax are adopted in different states, different transactions will
be taxed differently depending on the nature of business and the mode of
conducting business. This might lead to a jurisdiction with more liberal laws
relating to investment and governments may remain at risk of losing out
revenue.

Therefore, e-commerce transactions must be taxed in all the jurisdictions which reduces
the gap which exists with respect to rates of taxation.

ARGUMENTS AGAINST E-TAXATION:

 Going back to the original concept of the Internet creation, it required the free exchange
of information electronically and in such case taxing the digital economy is unjustified.
Moreover, these consumers also pay shipping and handling fees which further burdens
them.
 While entering into contract online, a consumer is majorly concerned with the quality
of product or services and remains ignorant of his information being leaked. This data

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 gathered from consumers can be utilised by the government to identify terrorist
elements. Therefore, e-taxation impacts the privacy of online consumers.
 It is argued that there is lack of proper rules and regulations and infrastructure for
successful implementation of e-taxation. There are also cost of compliance which
hinders online transactions.
 If e-taxation is encouraged it will cause a digital divide between the higher income
group and lower income group who would not have access to the benefits of e-
commerce owing to higher costs of transaction.

Though, it is difficult implementing taxation in cyberspace, the evolving technologies and

movement of markets towards e-commerce is a huge source of public revenue, therefore there
is need for governments to tax the e-transactions.

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 CHAPTER V: CONCLUSION AND SUGGESTION

CONCLUSION:

The research process started with collecting information from different sources. To develop a
basic understanding of the cloud computing with reference to its security various news articles,
books and research papers were analysed. The major difficulty faced while conducting the
research was selection of appropriate material from the pool of information. While working on
a topic of similar kind time constraints must be kept in mind.

E-commerce is a technologically oriented commercial activity, requiring different rules and

regulations due to the nature of its transactions. E-commerce has led to a global rise in the
activities of selling and buying goods and services online. In these types of transactions there is
no identified jurisdictional boundary which makes it difficult to lay down a universal formula
for all. The country where the supplier has his physical presence, must pay tax there, under the
notion that income is generated in his hands.

With the various kinds of products and services, it is a major challenge to categorize the
income generated. As the range of products and services offered are different, the taxation
rules for such services also vary. Clearly, e-commerce activities generate huge turnover for the
suppliers and an income in their hands, therefore, as a rule every income generated must be
brought within the ambit of taxation, which also provides security from happening of
fraudulent activities. Hence, it should be mandatory to tax the cyberspace transactions.

SUGGESTION:

 Co-ordination from different countries must be achieved, which helps in establishing

uniform rules and regulations of taxation.
 Taxing e-commerce transactions helps in controlling and regulating fraudulent
activities.
 For taxation in cyberspace, different products and services available must be identified.
 As the products and services offered on the cyberspace differ, the income generated
must be categorized properly for fair taxation.

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13
SCOPE FOR FUTURE RESEARCH

While doing research there were certain problems solution to which is not provided in the
current project which I propose for further research.

 Should foreign companies involved in e-commerce activities be taxed at higher rates.

 How the products and their value can be distinguished in e-commerce transactions.

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 BIBLIOGRAPHY

SECONDARY SOURCES
Books:
Vaitheeswaran K, Taxation of Digital Economy (2020)

Websites and Blogs:

 Pradeep KP, ‘Key Issues on Cyberspace Taxation’ (LAWYERSCLUBINDIA, 24
February 2011) <https://www.lawyersclubindia.com/articles/key-issues-on-cyberspace-
taxation-3542.asp> accessed 15 November 2016
 Vaitheeswaran K, Taxation of Digital Economy (Oak Bridge, 2020)
 ‘Taxation of E Commerce: A Theoretical Perspective’ (RACOLBLEGAL, 16 October
2016) <http://racolblegal.com/taxation-of-e-commerce-a-theoretical-perspective/>
accessed 15 November 2021
 Bagaria S, Khan AK, ‘Taxation for E-commerce: A Global Perspective’
(legalservicesindia) <http://www.legalservicesindia.com/articles/tax_ec.htm> accessed
15 November 2021
 Andrew B, Hughes M, ‘Tax Issues in Cyberspace’ (HEINONLINE)
<https://heinonline.org/HOL/LandingPage?handle=hein.journals/jlinfos11&div=8&id=
&page=> accessed 15 November 2021

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