E-Commerce has flourished all across the globe in accomplishing the attention of multi-national companies, small sized businesses and mainly consumers. E-commerce have changed the way the world functions right now. It has had an astonishing pace of growth and continues to do so even today. It is not surprising that e-commerce in itself has become an industry of its own. However, it is not new that with so many businesses emerging, that are actively functioning in the international circuit, the taxation system becomes a bit difficult to maintain. In addition, to this, the liberalization of the market as whole makes it even more difficult in terms of taxation of e-commerce businesses.
What is E-Commerce? “E-commerce (electronic commerce) is the buying and selling of goods and services, or the transmitting of funds or data, over an electronic network, primarily the internet. These business transactions occur either as business-to-business (B2B), business-to-consumer (B2C), consumer-to-consumer or consumer-to-business. The terms e-commerce and e-business are often used interchangeably. The term e-tail is also sometimes used in reference to the transactional processes that make up online retail shopping. In the last two decades, widespread use of e-commerce platforms such as Amazon and eBay have contributed to substantial growth in online retail. In 2011, e-commerce accounted for 5% of total retail sales, according to the U.S. Census Bureau. By 2020, with the start of the COVID-19 pandemic, it had risen to over 16% of retail sales.”
How does E-Commerce work? “E-commerce works on the same principles as a physical store. Customers come into your e-commerce store, browse products and make a purchase. The big difference is they don’t have to get off their couch to do so, and your customer base isn’t limited to a specific geographic area or region. To show how it works in action, here’s a look at a product’s journey when it is purchased online:
- A customer visits your online shop and browses your products. She settles on a shirt. She chooses the size and color and adds it to the shopping cart.
- An order manager or order management software confirms the product is in stock.
- If the product is available and the customer is ready to check out, she enters her payment card details and shipping information on your payment form or page.
- The payment processor, typically a bank, confirms the customer has enough cash in the bank or enough credit on her card to complete the transaction.
- The customer gets a message on the website that the transaction went through. This all happens in seconds.
- The order is dispatched from the warehouse and shipped. The customer will receive an email that the product is out for delivery.
- The order is delivered, and the transaction is complete.”
Taxation Overview: “Electronic commerce is opening new ways of innovative business practices with broad economic and social implication. In just a decade of outstanding growth, the Internet has shown its far-reaching capacity, appealing millions of consumers in a gigantic virtual shopping mall. EC can broadly be classified into four of the major market segments viz. business to business, business to consumer, consumer to consumer and consumer to business. B2B (Business to business) E-Commerce comprises the online sale of products and services between companies as opposed to B2C (Business to Consumer), which deals in the online business transacted between a business and individual customer. Prices are generally fixed in B2C in contrast to B2B transactions where prices are highly variable. In C2B model, instead of business, customers now demanded a service for a price that they’re happy to pay and waited for a business (or freelancer) to fill the gap. C2C (Consumer to consumer), is the business model that enables commerce between private individuals. The most noticeable examples of C2C include eBay, an online auction site, and Amazon, which acts as both a B2C and a C2C marketplace. The Internet has challenged many of the fundamental concepts of direct and indirect taxation. Governments all over the World are struggling in coping with issues of taxing E-Commerce. This is because of lack of comprehensive understanding, communication technologies, complex nature, and modus operandi of the business. To formulate a rational tax policy, one should understand the nature of E-Commerce industry. Some of the peculiarities of Internet are:
- It is a network of networks which cannot be controlled by one person.
- Data Transmission at an unmatchable speed.
- User friendly graphical interface.
- Massive information on a single click.
- No territorial and geographical limitations.
- Automated payments mechanism.
- The Internet can re-route itself if one computer is connected to the net.
Keeping these unique features of Internet in mind one can visualize the issues surrounding taxes on E-Commerce. Less than a year after Turku, OCED ministerial conference at the Ottawa entitled “A Borderless World – Realizing the potential of Electronic Commerce”, a global action plan for electronic commerce was prepared by business with recommendations for governments.”
“The e-commerce has grown tremendously and continues to grow at a phenomenal rate. The WTO estimated, in December 1999 ministerial conference in Seattle USA, that by the year 2001 there will be 300 million Internet users. Today the figure can be estimated to have crossed the figure of 400 million internet users worldwide. The value of e-commerce transactions in 2001 stood at $ 300 billion, according to WTO. The main beneficiary of this growth is the USA. According to a survey by NUA, an Internet consulting and development firm ,24 per cent of US companies were selling goods and services online in 1998.”
Challenges: “The taxation policies of countries based on territory and jurisdiction has begun to fail after improving e-commerce. Concepts like permanent establishment, sale points, product and income classification that using in taxation process have been remained inadequate. Whereas determining location of seller and consumer at transaction on internet is difficult, tax revenue loss has been existed. Electronic commerce allows businesses to get their revenue without any physical presence. (Basu, 2008) Because of these implications of e-commerce, tax administrations reach hardly information about taxes that should be collected and thereby tax loss exists.
In Ottawa Conference were arranged to find solution to taxation problems of e-commerce underlined that conventional taxation principles should be applied to e-commerce and collaboration between countries has been required. Fair and neutral taxation should be generated for conventional commerce and e-commerce. An efficient taxation system should be provided to reduce compliance costs to businesses, administrative costs. Tax rules should be clear and certain. Taxpayers should know how and in which situations they are taxed. Effectiveness and fairness should be ensured on taxation process. Tax systems should be flexible adapting to technological and commercial development. Taxation place for consume tax should be where the consumption happens. Otherwise, double taxation and non-taxation problems may be occurred. (OECD, 2001)
Another problem for taxation of e-commerce arises from being made by a permanent establishment that is not required. To apply tax and to identify one who has taxation power, it is necessary to pointed out physical presence and permanent establishment. According to OECD, website is not a permanent establishment and if business purchase or hire server and activities on server are being made a preparatory or auxiliary. (OECD, 2005).
To be made e-commerce around the world without any borders and different applications about taxation on e-commerce lead to double taxation risk. Countries figure this issue out with double taxation avoidance agreements. (Kommerskollegium, 2012) But the risk still exists for business where operated in countries that have not got agreements.
It is also another problem to be subjected different rate and policies of tax on goods and services in the field of taxation on e-commerce among countries or states. Both EU and USA, taxation is made on final sales to type and value of goods. While this tax is collected by EU as value added tax, it is collected by localities and states in USA as consumption and use taxes. Each state, county and municipality in USA have their own tax policies and tax rates. It becomes a problem for taxation. For instance, while cheese can be taxable in one state as a snack food, in another state it cannot be taxable. (Laudon and Traver) The uncertainties on VAT regulations, who has taxation power for collecting VAT and requirements of registering pose a problem. The countries divided by states and each state applies different tax regulation cause extra costs and difficulties in term of electronic sellers. Varied tax regulations between states particularly affect businesses that sell via internet and accept returns in stores. (Kommerskollegium, 2012).” 
 What is E-Commerce? Definition and Meaning (techtarget.com)  What Is E-Commerce? - businessnewsdaily.com  The Challenges of Taxing E-Commerce, Shariq Nadeem, Oct 2018. Retrieved From: The_Challenges_of_Taxing_E-Commerce.pdf  E-commerce and taxation: Pakistan perspective - Newspaper - DAWN.COM  The Role of Taxation Problems on the Development of E-Commerce (sciencedirectassets.com)