PROJECT WORK

CUSTOM DUTY ON E-COMMERCE TRANSACTION

SUBMITTED TO: SUBMITTED BY:

MS. PRATIMA SONI AAKASH BAMAL

ASSISTANT PROFESSOR L/1504

SCHOOL OF LAW SCHOOL OF LAW

Introduction

One key issue to be addressed in the area of Services is that of electronic commerce. In
order to initiate a policy debate on the subject, it would be useful to present some of the key
questions and emerging issues in this area. The WTO related issues for electronic commerce need
to be spelt out and examined from the viewpoint of developing countries in general and India in
particular. For an India country policy and strategy perspective, it is also important to focus on
some of the key policy framework initiatives that need to be concentrated upon for e-commerce to
be beneficial and successful. This paper seeks to position these for discussion and debate.

Globalisation and the new ‘digital economy’ together are having a major impact on the
global economy. National markets, including in developing countries, have been affected by
changes in the global economic environment, and further such changes will continue to affect
enterprises and citizens throughout the world. The impact of e-commerce for developing countries
is at present mainly in the international trade sector. Studies indicate that over the past few years
the import and export industries have grown significantly, and, therefore, the impact of e-
commerce would be significant. E-commerce will also have a significant impact on the services
sector as not only is this the fastest growing sector today, it is also the sector with the greatest
potential for offering digitised service and transactions. For several countries this is of particular
relevance as the majority of their workers are employed in the services sector.1

The potential of e-commerce is no more a matter of debate. From the world of hype and
fantasy it has moved to that of digital reality. Since e-commerce already affects the economic
relations between and within countries and companies, and will continue to do so more and more,
it has to be seen as a matter of key policy consideration. 2 As ecommerce growth becomes more
and more significant, countries such as India must not only address and appreciate its potential for
the growth of trade and industry but also as a means of survival in the new world of e-commerce-
based trade and business. The ability to do so will depend on several factors, the most important
of which will be infrastructure, both physical (the telecommunication network) as well as the

1
International Labour Organization (1999).
2
Singh, (1999).
financial and legal framework, including a business and trade environment conducive to e-
commerce. It will also depend on the availability and price of hardware (computers, routers,
switches, etc.) and software, as well as the human resource and education standards and policies
of the country.

Developing countries, such as India, also need to prepare themselves for the future
multilateral trade agenda, in particular the so-called new issues on which the Second Ministerial
Conference of the World Trade Organization (WTO) in May 1998 asked the WTO General Council
to formulate recommendations. One such issue is e-commerce which is presently under study in
the WTO. E-commerce is not only a new technology and a new frontier for global business and
trade, it is also still evolving. Developing countries, therefore, need to understand, and assess
carefully from their perspective, the pros and cons of the different proposals and issues in this
connection that have emerged at the WTO. They need to comprehend the possible impact of this
new phenomenon on their economies and work out appropriate strategies and responses to it.
However, unlike most other trade-related agenda items before the WTO, this is an area that is not
just new but also one where many of the implications are as yet unclear.

It is essential, therefore, to create a policy and regulatory environment that favours the
development of e-commerce and harmonises national approaches in diverse areas such as
telecommunications, trade, competition, intellectual property, privacy, and security. This paper
endeavours to fulfil this requirement. Section 2 provides a description of ecommerce today and its
potential as well as the present status of its development. Section 3 outlines the present status of e-
commerce in India and traces some of the factors responsible for the success especially in software
exports. Section 4 discusses the need in a developing country such as India to firmly establish the
required legal and financial framework and to promote the building of the required human
resources in the context of the ‘info-structure’ that is a necessary ingredient for the growth of e-
commerce. Section 5 discusses some policy issues relating to e-commerce and the international
trade regime. Section 6 lists some of the suggestions and recommendations and pointing towards
the possible future strategy and policy agenda for India.
 There will always be the distinction and disagreement between descriptive and prescriptive.
Policy making requires both 'knowledge of' and 'knowledge in' policy making, 3 as described by
Harold Lasswell (1970). Despite the danger of sacrificing 'policy analysis' to 'policy advocacy', it
is important to state up front that the emphasis of this paper will be more on the prescriptive (how
policies ought to be made or should be made in future) than the descriptive (how policies are being
made or are in existence), with the rider that it should be viewed more as analysing the prescriptions
or options rather than recommending any single best practice or fixed approach.
The International Trade Regime

The ICT revolution and e-commerce are building a new digital economy where several of
the technological issues and standards are being authored and determined by transnational
corporations, especially in the telecom world. This is resulting in a shifting of the locus of much
policy-making from government to private business. This is best illustrated in the growing
importance of the WTO as opposed to the traditional UN organizations that so far determined and
discussed these issues such as ITU, UNESCO, UNCTAD, WIPO, UNCITRAL etc.40 Though this
is the reality, it is important that these other organisations continue to deal with several other
important issues that impact on trade such as telecom infrastructure, Internet management, security
and privacy, etc.

For India, the trade-related or WTO-related issues for e-commerce should be looked at from
a dual perspective:

(1) The negotiating stand our diplomats and experts would take, where traditionally they would
tend to argue from a South perspective. (India, like most other developing countries, has
been arguing that WTO negotiations should be confined to the ‘built-in agenda’ of the

3
Laswell (1970), as quoted in Hogwood et al. (1989).
 existing agreements, though for some years now, it has been indicated that we are willing
to negotiate on e-commerce and IT as these can contribute to the development process.);

40 Hamelink (1999). ITU: International Telecommunications Union; UNCITRAL: United Nations

Commission
on International Trade Law; UNCTAD: United Nations Conference on Trade and Development; UNESCO: United Nations Educational,
Scientific and Cultural Organization; WIPO: World Intellectual Property Organization.

(2) The larger economic perspective of India Inc.—both national and global. A perspective
that should see the potential of the India as a global knowledge power—irrespective of the
result of negotiations at the WTO.

E-COMMERCE AT THE WTO

The issue of e-commerce was raised first in the WTO by the United States in February 1998
as a market access issue with the proposal for member states not to impose any duties on electronic
transmissions. Though pushed through by the US as a ‘standstill’ measure till the next General
Council, the issue has been transformed into a full-blown study and debate on essentially three
major issues:

the question of agreeing to a permanent ‘stand-still’ on the customs duty imposition position,

the question of characterisation of e-commerce, either as a good, service, or something else

from the standpoint of the existing WTO agreements, and

the question of protecting IPRs4 on the Internet.

The immediate practical concern of the US was to achieve a permanent global ban on tariffs
(or ‘stand-still’, as it is referred to) on products and services which can be delivered electronically
via the Internet. This resulted in the May 1998 WTO Ministerial declaration on global electronic
commerce and the on-going WTO work programme on ecommerce. The Ministerial declaration

4
Intellectual property rights.
of 20th May 1999 directed the General Council to establish a comprehensive work programme to
examine all trade-related issues relating to global electronic commerce, ‘taking into account the
economic, financial, and development needs of developing countries’, and report to the third
session of the Ministerial Meeting. (Four WTO bodies—The Committee on Trade and
Development, the Council on TradeRelated Intellectual Property, the Council on Goods, and the
Council on Services— reviewed the manner in which existing multilateral trade agreements apply
to global electronic commerce). It also asked all members to continue their current practice of not
imposing customs duties on electronic transmissions at least until the next Ministerial meeting.
This next meeting was the now infamous Seattle Meeting, where for several reasons the issue could
neither come up nor be decided upon. The draft declaration though had penned down the
continuation of both the work programme on electronic commerce as well as the ‘stand-still’.42
Despite reservations from some quarters, Doha 2001 carried ahead this same arrangement. In
essence, this perpetuates the status quo on tariffs as desired by the developed world while
continuing with the ‘negotiations’ or discussions in the four councils entrusted with the work
programme.

Initially introduced as an issue in international trade policy discussions, ecommerce has

become a subject of multilateral negotiation at the WTO. Formulating negotiating positions at the
WTO, therefore, continues to be a matter of concern for developing countries including India.
Several developing countries are arguing that the continuation of the moratorium on customs duty
should be linked with all other transition5 issues and a package solution be found. Some of them
(including India) also want that the work programme at the WTO should address all the
‘substantive’ issues, i.e. to assess also the possible negative impact of e-commerce and the digital
economy on developing countries.

The question that arises is why there is so much discussion and debate on this and what the
interests of the different countries may be in this.

Complexities of e-commerce transactions

5
A reference to the transition periods provided with some of the earlier agreements on trade and services where
developing countries feel they need more time.
 The Internet as a means of trade raises several complex issues. The following example
helps elaborate the complexities in the types of transactions that are now possible with e-commerce
in relation to a common anti-virus software programme:

42 This text was put forward although it did not enjoy the full consensus of all WTO Members (Sen
2001).

1. A consumer could just buy it at a store near by, packaged in a CD.6 (This could be an
imported product.)

2. The manufacturer could send it over the Internet to local or cross-border distributors who
then copy the programme on to CDs and sell them at their store to local consumers.

3. A consumer could order it over the Internet from a domestic or cross-border manufacturer
and it would be mailed to him.

4. A consumer could order it over the Internet and it could be sent in digitised format directly
to the computer of the consumer.

5. A consumer while ordering the software could choose an option whereby the programme
is regularly updated through the Internet by the supplier.

6. Another option could be that it would be updated or modified based on interactive and
customised requirements of the buyer.

7. A further possibility could be that the consumer makes an illegal copy of the software and
either just passes it on to a friend, or in fact sells it further, either in the form of a CD or
just as an attachment to an e-mail, for example.

Of the above-mentioned seven different variations on the transaction (there could be more),
only the first conforms to traditional processes of buying and selling and is fully covered by
existing trade agreements. The balance six are all Internet or e-commerce enabled transactions. (In
fact, even in the first, a consumer may have checked out prices, store locations etc. via the Internet
before going to a regular store to purchase the software programme).

6
Compact Disc.
 Some of the complexities are mentioned here. Firstly, there is the question of tariff. This
becomes an issue in all the cases where the good has not passed through a recognised customs or
domestic tax point (when it does, the existing tariff structure would be applicable). In all the other
cases, it would depend on the supplier, distributor, or consumer to declare the transaction and pay
the relevant duty or tax. For governments, the issue is not just enforcement but also valuation.
Secondly, this raises the question of whether the trade transaction was for a good (such as CD—
transaction no. 1, 2, and 3 above) or was it a service (on-going anti-virus protection—transaction
no. 4 and 5 above)? And if it is a service, was it non-standardised and customised (transaction no.
6 above)? Thirdly, the issue of intellectual property protection arises in the last case (transaction
no. 7 above). (Variations of this example could be there for any digital transaction.)

All the above scenarios have implications not just on existing international trade
agreements but also on future negotiations and positions to be taken by all countries, including the
developing countries.

ISSUES OF MARKET ACCESS: CUSTOMS DUTY

The question of how to monitor and how to tax is a complex one. For strategy makers, they
concern the issues of tax and tariff regimes as much as negotiating stances at the WTO in response
to the on-going stand-still on digital transactions. The positions on possible duty impositions are
not so clear-cut. For some developing countries such as India, Singapore, Malaysia, etc. where
most of the flows of digital services and software (developed domestically) are outwards to other
countries, export duty is not an issue because export flows are not taxed. On the import side,
software and information inflows for processing in back-end offices45 and call centres7 are mostly
not subject to duties either—a measure to encourage the IT industry and exports. However, this
situation may not hold good for financial and other service transactions. Hence the question as to
whether or not tariffs should be levied needs to be very carefully considered. Customs duties are a
very important source of revenue for cash needy governments in poor countries. It is therefore,
important that the full implications of levying duties or otherwise are studied carefully and time

7
Centres where customers call or connect via the Internet for varied services from reservations to queries.
given (for better technologies to emerge that would make duty valuations possible and enforceable
for digital commerce also) before any final decisions are taken on this matter.8

Tariff (and taxation) issues also raise the concept of PE or ‘permanent establishment’ and
the problem of jurisdiction. The Internet and e-commerce challenges the very concept of PE and
therefore, gives rise to the question of how business transactions of enterprises located across
borders are to be traced and taxed. This also has an impact on classification of the transaction
which will be touched upon later in this section.

Essentially this problem of duty or tax occurs only when commerce has taken place purely
in a digitised format, i.e., where all parts of the transaction have been completed ‘on-line’ in digital
or computerised format and no goods have directly passed through a recognised customs or
domestic tax point. Where e-commerce has been used only to communicate and set up a transaction
and the actual delivery is by regular means, the existing tax and duty regulations and procedures
continue to apply and can be monitored. For digital supplies, the problem for the authorities is to
monitor or even be aware that a transaction has taken place.

Towards an Indian position

According to an UNCTAD study,9 that tried to estimate the loss of revenue on account of
digitisable products being purchased on-line, the tariff revenue loss accounts for less than 1 per
cent of total tariff revenues. This appears to be confirmed in the Indian case. According to a recent
ASSOCHAM report,10 India imported digitisable media products to the extent of US$ 198 million
in 1996 when the applied tariff rate was 26 per cent. The estimated tariff revenue was US$ 51.3
million. Assuming that the digitisable media products account for 50 per cent of total products
which are deliverable in digitisable form, the revenue loss would be about US$ 100 million, which
will be less than 1 per cent of the total revenue coming from import duties. Of course this does not

8
Singh (1999).
9
UNCTAD (2000).
10
ASSOCHAM (2000).
take into account ecommerce services, be they financial, travel, architectural design, etc. But then
internally we do not tax these directly and today we do not really account for these, as such advice
or service conveyed through fax or phone is not taxed.

For India, there are two dimensions to this tariff issue—the time and the policy dimension.
On the first, the basic fact is that we really have nothing to lose as of now if the issue of e-commerce
remains undecided or unresolved at the WTO. After all, our software and IT-enabled services
exports are continuing to grow at a high rate. Does e-commerce threaten our duty collections
substantially? Apparently not for the moment, but we may be not willing to extend the ‘standstill’
indefinitely as we may have such need or requirements to levy duties in the future.

It is important to note here that at the domestic front, the question of taxing ecommerce is
still under consideration and the Central Board of Revenue has last year circulated a policy paper
on it. The industry position on this, as represented by NASSCOM, is that no tax or duties should
be imposed on digital e-commerce.

THE ISSUE OF CHARACTERISATION

E-commerce raises some fundamental issues at the WTO. First, it blurs the distinction
between a good and a service. This matters because WTO rules treat goods and services differently.
Goods tend to be subject to tariffs; services are not, but trade in services is limited by restrictions
on ‘national treatment’50 or quantitative controls on access to foreign markets. So the rules that
will be devised for electronic commerce may affect the choice between physical and digital
methods of trade.11

The WTO discussions on e-commerce see it as divided into three broad categories for the
purpose of policy discussion: (i) the searching stage where producers and consumers, or buyers

11
World Trade Survey, October 1998, The Economist, London.
and sellers, first interact over the Internet; (ii) the ordering and payment stage once a transaction
has been agreed upon; and (iii) the delivery stage.

The new issues relate mostly to products that can be delivered electronically through the
Internet [stage (iii) transactions], as this is where the most significant policy questions arise. It is
also argued that the WTO already has market access regimes52 in place—the General Agreement
on Tariffs and Trade (GATT) which deals with trade in goods and the General Agreement on Trade
in Services (GATS). The obvious question that arises is whether either (or both) of these regimes
provide an adequate framework for dealing with market access vis-à-vis electronic commerce. The
example above illustrates that this is not a simple question.

So far as trade in goods is concerned, there are some products that can be digitised and sent
over the Internet to be again converted into a good. Some examples are: music converted into a
CD; information or writings converted into a book; videos and films transmitted digitally and
converted to hard copies; graphics, pictures, designs, etc. In all such cases, the end usage could of
course also continue to be in digital format. Even if they are, there would be a problem of valuation.
Also in the case of customised writings and music, say for a theatre production, they could very
well be treated as trade in services. In other words it would be a non-standardised usage or
service.12

As per classical concepts, goods are tangible and services are intangible. Ecommerce
complicates this classification as digitisable goods can be electronically transmitted and, therefore,
could be considered to be ‘intangible goods’ on the analogy that these same ‘goods’ can have
physical counterparts that can be delivered physically across a border.13 It has also been suggested
by some law experts that electronic transactions may be ‘goods’ if they have some value that can
be owned, if they exist independently of their owners, and can be traded. On the other hand,
‘services’ could be defined as things purchased by consumers that do not have physical
characteristics, i.e. they cannot be possessed and have no independent existence from their owners.
For example, the first would apply to music and videos that can be ‘burned’ on to CDs, whereas

12
A book or music or software on a CD for mass consumption would be treated as standardised products, whereas
customised writings, music, software etc. would be non-standardised products and classified as services.
13
Satapathy (2001).
the latter would be audio and video streaming services on the net. The issue or challenge here
would be to develop a set of characterisation factors that apply to all transactions on the net.14

It is argued by several countries and experts that the agreement on services (GATS)
encompasses e-commerce and that all services are covered by it whether delivered electronically
or otherwise. Today the great bulk of products delivered electronically, like telecommunications
and financial services, are covered in the services classification lists. However, would this cover
all existing services and all digital transactions? Even for existing services, there is no compulsory
or universally agreed classification system. In many instances the nomenclature used is that based
on the provisional Central Products Classification (CPC) of the United Nations. However, this
classification is not used in a number of sectors, including financial services, telecommunications,
air transport, and maritime transport. Moreover, it must be noted that this classification was last
issued in 1989 and therefore today’s technological developments and delivery options could not
have been foreseen.

It is also being argued that for services the principle of ‘technological neutrality’ 15 applies
and the mode of delivery does not matter. This notion was used in the negotiations on basic
telecommunications and does not have legal binding status. Thus, it cannot be applied retroactively
and automatically to market access and national treatment principles negotiated in earlier services
agreements.16 In this debate about ‘transport modes’ what is important is not the way in which
goods, services, and information are ‘carried’ (whether electronically or by traditional means) but
the way in which value is added.17

14
Shah and Ogoti (2001).
15
Concept that in the negotiations concerning the GATS agreement, the services or transactions envisaged were
not meant to be dependent on the type of technology used nor the mode of delivery.
16
UNCTAD (2000).
17
ITU (1999), Millennium World Telecom, ITU, Geneva.
 For most products traded in e-commerce, the distinguishing characteristic is the mode of
delivery (whether of the order or the service). For digitised products, the distinction is not clear;
e.g. books, music, software are treated as goods as they are delivered in the form of paper, cassettes,
or discs. If such products can be digitised then no carrier medium is required and then it becomes
appropriate to classify these as services. Such intangible goods could then come under the ambit
of intellectual property rights (IPRs) and thus trade in such goods would be considered as trade in
IPR and not in goods and services.

Sen (2001) has correctly argued that classification is in fact a cross-cutting issue, and the
most significant, as the final resolving of it will decide most other issues. It has direct implications
for both the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and, of
course, services.

There has been extensive debate on characterisation, with contrasting (and valid) points
made on all sides. Yet, no one definition has been agreed upon by all Members. Different
classification systems continue to be used for goods and services and, therefore, it is necessary to
evolve a single system for electronic transactions. A decision, therefore, has to be taken on the
revenue, administrative, and regulatory implications of treating ecommerce as goods or services
or intellectual property or anything else (Sen 2001).

The European Union (EU) favours the classification of electronic transmissions of

digitisable goods as services and favours the collection of Value Added Tax on such transmissions.
The US on the other hand continues to lean towards classification of electronic transmissions of
digitisable products as ‘goods’ with no tariff being levied on them. These positions are based on
the present and perceived usage of this medium where the EU’s desire is to keep the audio-visuals
outside the scope of GATT—even when there is cross-border physical delivery.

At Seattle, the WTO draft declaration relating to e-commerce affirmed ‘that the electronic
supply of services falls within the scope of the GATS’. This, however, relates specifically to the
electronic delivery of services (as one more option or mode of supply). It does not encompass the
entire gamut of what electronic commerce is and may evolve to be. The Doha meeting did not shed
any further light on this position and restricted mention of e-commerce to only the stand-still and
the on-going work programme.

Some Implications of Classification

The fact that the debate continues, and is still in discussion, itself implies that the issue is
sensitive and has trade implications for software and e-commerce businesses. Some of these are
given below.

Characterisation as Goods

Customs duties/tariff may be applicable for supply of music and videos via the net even
though technically this is not yet feasible. Even local countervailing or excise duties could
become applicable.

Anti-dumping provisions could be imposed on music goods for example and quotas on films
could be extended to the net.

Content could be regulated based on varying laws in countries ostensibly to protect ‘public
morals’.

Rules and regulations for prevention of deceptive trade practices may become applicable.

Characterisation as services

Digitised services could fall within the scope of various services.

Applicable service tax if leviable would need to be factored in.

Specific commitments under the four modes would be applicable and market access would
need to be re-negotiated.

Content regulations would apply as GATS permits limitations on grounds of both ‘public
morals’ as well as ‘public order’.

Laws and regulations pertaining to privacy would need to be honoured.

Implications of IPRs

Some of the country compliances on content relate to effective protection of IPRs.

Ownership of the IPR would have to be decided upon in most business transactions where
value has been transacted.