Yesterday I got a mail from Google mentioning that I had just two days to decide on renewing a storage purchase that I had done last year, when I had run out of the 8 GB free storage that comes with a Gmail account. When I gave my consent for paying 200 bucks for an additional 20 GB storage for a year, I thought about the tax that should be paid on this transaction.

Had I purchased physical storage, the tax would have gone to my local Government. In this case, though I am using the purchased storage in India, my taxes have actually gone to the California Government or wherever Google’s servers are. The same applies when I download apps from Apple, Android, Amazon or Blackberry. I am actually paying taxes to the US Government!

This got me thinking – the taxation of Internet Commerce is a complex issue that Governments need to handle with the right policy decisions. They might appear to be small issues today, but very soon, this will become economically significant as the volume of transactions go up. Governments, world over are looking for more resources and as economies move more and more towards electronic commerce, the importance of taxes from electronic transactions and IT services will grow. What is required is that Governments must figure out a way to tax it, or else lose out on the much needed revenue.

Another trend in IT these days is the move towards Cloud Computing which allows Governments and Companies to access IT resources as a Service over the Internet. One is not required to invest in the IT infrastructure, Software and Services upfront but can use from any Cloud Computing Service provider who deliver applications online that is accessed from a browser, while the software and data is stored on the servers of the Cloud Computing Service provider. Most commonly Cloud Computing Services are provided in the form of Software as a Services (SaaS), Platform as a Service (PaaS) etc.

The issue of taxation of such services provided on a Cloud Computing Model become complex as the problem is – where is the Cloud located? If companies are accessing Cloud Services from outside India, can the Indian Government tax it? World over, the practice is to tax it where it is used, whereas in some cases, it is taxed based on the location of the servers. In some cases, it is taxed at the place, where the office of the cloud computing provider is located. All these options result in real policy challenges for Governments to decide on taxation of cloud computing and other electronic commerce. If the cloud services are provided by operators within the country then it becomes an intra State issue to resolve. However, in cases of Cloud Computing Services being provided by transnational companies, the issues go into the realm of International law and Taxation domain.

There are no easy answers. Cloud computing is basically computing without borders. However, for governments that depend on tax revenues on goods sold within their borders, such a situation is definitely not welcome. For them, cloud-based services are similar to off-the-shelf software purchases, which are of course taxed. On the other hand, cloud computing companies claim that it amounts to providing Software as a Service which will be governed by the local laws where the cloud computing company is located or where their servers are. These locations are mostly in the US where these are non taxable. As a country, we would like to believe that since these services are being consumed in India, we do have a right to tax the service. The situation compounds further in cases where Infrastructure, Platform and Storage is provided as a service on the cloud model.

In the absence of clear rules and protocols in this regard, it is likely to result in disputes and confrontations between businesses and governments world over. With the coming in of mobile Internet and people using thousands of apps which are offered today on Apple, Blackberry and Android platforms, the issues of who taxes these services and who gets them are going to become more complex.

In the United States, companies like Amazon and Apple are lobbying for laws to prevent the States from taxing them. In fact they have managed to form the Download Fairness Coalition to lobby on the issue and have enlisted the support of lawmakers across political affiliations. Senator Ron Wyden, an Oregon Democrat, and House Judiciary Committee Chairman Lamar Smith, a Texas Republican, are both backing federal legislation that would regulate and limit states’ taxing authority of digital goods and services as provided over the cloud.

What we in India need is to ponder over and ensure a framework is created which addresses all national issues. On one hand we would not want to lose the tax revenues which rightfully belongs to us. At the same time, we would not like to hinder the growth of Cloud Computing as it has the potential of saving costs for Indian Companies and helping them to be leaner and more efficient. The simple answer will be to have more Indian companies offering Cloud Computing Services, but then we will come to issues of taxation and revenue sharing amongst the States, which also is a pretty complex issue.

Important: Views expressed are entirely personal.

Mr. Abhishek Singh is an offficer of the Indian Administrative Service (IAS) and is currently posted as Director, E Governance in the Department of Information Technology, Government of India. He is actively involved in policy formulation and monitoring of the implementation of National E Governance Plan in the country. He is the national head for the Common Services Centers and the E District projects. He is @abhish18

(c) Abhishek Singh 2011