Online software trade thrives in tax vacuum

E-commerce moves faster than government and taxes! In fact, a few governments may have realized that they are losing revenue to cross-border Web-based software purchases.

Even as the electronic delivery of software ramps up, the regulatory regime, awaiting wider consultation, is yet to evolve. India, like many other nations, has no current plans to bring such transactions under the tax net.

The draft report of the International Conference on e-Commerce on tax reforms in India, suggests that where a server is used to accept payment or digitized delivery of goods, the server could be considered a 'permanent establishment'.

Commerce ministry's joint secretary JK Dadoo said that online sales or software upgrades are usually done through parent company's website, often US-based. "Bringing such transactions into the tax net by taxing their subsidiaries may not be appropriate, as the online sales will be claimed by the parent company," he said.

Such a taxation attempt could have adverse reactions. "Other countries may follow and introduce taxes on Internet-based sales, which will affect online sales of products and services of Indian software companies and their subsidiaries in foreign countries," Dadoo added.

From giants like Microsoft and Adobe, to small anti-virus firms, all have brisk sales and upgrades online, in the absence of a tax regime. For shrink-wrapped products, these same software firms pay close to 25 per cent of the sales price in the form of service tax, VAT, and withholding tax.

The recent Windows 8 upgrade by Microsoft (a limited-period offer) was conducted by its Germany-based reseller Arvato, and managed by Microsoft's Singapore subsidiary. This price upgrade left the Indian government and Microsoft's traditional channel partners out of the loop.

Microsoft informed that their Windows 8 upgrade offer was an online, e-commerce transaction. It was said to be no different from any other e-commerce transaction that consumers in India and abroad undertake on a routine basis when they buy apps, content or music from various online marketplaces. "Microsoft Singapore has extended this offer to consumers in India through its reseller in Germany," it added.

Pavan Duggal, senior Supreme Court attorney and chairman of the Assocham's Cyberlaw Committee, said that online software taxation is in infancy, and it's also a good time to promote e-commerce. "There is neither any amendment in the taxation regime worldwide, nor does India have a policy, though a tax opportunity is indeed slipping by," he said.

On online upgrades, such as the Windows 8, Duggal said there could be a potential tax evasion. "If the company is charging its customers in Indian rupees for online purchases, or has an establishment in India, it could be liable to pay appropriate tax," he added.

Perhaps, the Indian lawmakers, and elsewhere, need to bring in some amendment in their respective tax regimes, whereby, any online purchase, especially of software, is subject to some tax, at least!