Legal issues and suggestions

Mar 01 - 07, 2004

These are many factors which can lead to evasion the collection by e-commerce. The section starting from 108 to 112 has enunciated in Income Tax Ordinance of 2001 related with the antiavoidance measure that could be adopted by the commissioner for the purposes avoidance of the taxes. In spite of fact that the antiavoidance provisions are available for curbing the avoidance of the taxes but the legislate provision are not sufficient to meet the complexities of e-commerce transaction owning to following factors.


Thus far we have examined the Internet's impact on existing taxation frameworks on the assumption that any transactions conducted over the Internet would be to some degree either self-reported or within the investigative and enforcement powers of revenue authorities. This however is not always the case. In fact, the special characteristics of the Internet, i.e. its lack of central control, combined with its international reach make it very difficult, if not impossible, to regulate the vast amounts of money that are expected to travel through it. The Internet is used for tax avoidance and other criminal shifting of income.

The web server could be located any where, irrespective of fact that transaction has been taken place, the remote web server location provide easy room for the concealment of the identity of the transaction.

There is very ineffective construction of section 108 of income tax ordinance regarding the question of transaction which has realised in an arm's length transaction,"...The Commissioner may, in respect of any transaction between persons who are associates, distribute, apportion or allocate income, deductions or tax credits between the persons as is necessary to reflect the income that the persons would have realised in an arm's length transaction."

The strict construction statute with intrinsic aid of appropriate phrases conveys exact meanings that can lead to exact interpretation of statute according to intention of legislatures. The transaction has been conducted by e-commerce means requires substitution of texts which could embody the scientific mechanism into statutory provisions.

The Sub-section 3 of section 111 of the Income Tax Ordinance related with the antiavoidance policy, the authority has been vested on the commissioner to question the satisfactory account of the expenditure of the account of other resources,"...and the person offers no explanation about the nature and source of the amount credited or the investment, money, valuable article, or funds from which the expenditure was made or the explanation offered by the person is not, in the Commissioner's opinion, satisfactory, the amount credited, value of the investment, money, value of the article, or amount of expenditure shall be included in the person's income chargeable to tax under head "Income from [Other Sources"] to the extent it is not adequately explained."


The taxpayer can hide the identity of parties by tampering the database the website, where it has been uploaded.


Where the declared value of any investment, valuable article or expenditure of a person is less than the cost of the investment or valuable article, or the amount of the expenditure, the Commissioner may, having regard to all the circumstances, include the difference in the person's income chargeable to tax under the head "Income from [Other Sources"] in the tax year in which the difference is discovered.

The deletion of the database is possible within fraction of the moment, which could provide enough opportunity for the tax payer to tamper with the record of the transaction in remote server and evade imposition of taxation.


There are often privacy and security contract between the hosting site and their clients that provide room to the website for maintenance of the security and privacy of the database. The level of maintenance of the security and privacy provided by the web servers to their web hosting clients often provide opportunity to the taxpayer to tamper the record and provide shelter for tax avoidance.

There often arise jurisdiction problems, the taxing authority have the jurisdiction to enforce the any order for access to the data base of the website.


Look here the power has been restricted under the section 94 of C of Cr.P.C. (Act V of 1898) for getting access to banking records,"...Provided that no such officer shall issue any order requiring the production of any document or other thing which is in the custody of bank or banker as defined in Banker' Evidence Act, 1891(XVII of 1891), and relates or might disclose any information which relates to the bank account of any person except..."

The first and lesser problem relating to the regulation of Internet commerce for tax purposes is the uncertainty of whether current laws will even apply to financial transfers on the Internet. By requiring very specific documentation of every transaction the government can attempt to extend the regulations that apply to paper based banking into "cyber banking". Nevertheless, it appears that this legislation will primarily be targeted at technology such as automatic teller machines and wire transfers, but will not contemplate newer banking applications such as the Internet. For example, the requirements that consumers receive receipts and periodic statements reflecting electronic transfers of money do not make sense when applied to stored-value cards that operate independently of a bank account. Stored value cards will likely replace cash to a significant degree as we move towards an increasingly paperless society.


As the Internet evolves and becomes more accepted as a commercial trade route, companies on the Internet will have to abide by their own domestic sales tax laws. The same may be true for customs duties in the form of a withholding tax. But suppose a company, is operating a commercial Web site that is hosted by a computer in a tax haven country. The ramifications to the concept of electronic-cross-border shopping could be very serious for government revenues. There would be no way for governments to collect sales taxes because of the lack of a treaty, and there would be no way to collect customs taxes because of the technical impossibility of customs checkpoints.


Here are illustrated principals and devices are used for purpose of curbing the tax evasion.

RECONSTRUCTION OF TAX STATUTES BY PRECEDENTS: There is no precedent available because of the non-legislative areas of taxation. Nevertheless foreign precedents are admissible under CPC of Act (V of 1908). Here leading cases have been conducted in United State which can provide extrinsic aid in construction of statutes.

CONSTRUCTION BY FOREIGN AND DOMESTIC STATUTORY PROVISIONS: There are few statutory amendments have been made to remove the inadequacy and deficiency in law of evidence to provide legal frame work for creating evidential ground for collection e-commerce taxation. However the taxing authorities can get benefit of the promulgation of transaction law. This is big question mark for revenue authorities, how they can implement it?

THE CERTIFICATION SERVICE PROVIDER: Under subsection 1 of Section 24 of electronic Transaction Ordinance 2002 deals with establishment of electronic certification council,"... The Certification Council may grant accreditation to certification service provider, its cryptography services, electronic signature or advanced electronic signature and security procedures who comply with the criteria for accreditation specified in the regulations."

Under subsection 1 of Section 19 of electronic Transaction Ordinance 2002 deals with extension of permission to accredited Certification Services Provider to provide certification of electronic evidence.

Currently no Computer Forensics Authorities are running their business in Pakistan, reason may be, no efforts are made to provide legal framework for establishment of certification authorities and to discussion the economic measures for their promotion are out scope of thesis.

COMPUTER FORENSICS AUTHORITY: There are impartial computer forensics authorities who provide all litigation function at request of courts and their services can obtain for getting assessing computer evidence. Computer Forensics identifies, acquire, restore, and analyze electronic data in litigation.

Here need to encourage the computer forensics in Pakistan for getting accurate information for digital evidence. Their services can be obtained by contractual basis, or they can be incorporated in taxing authorities as confirming them special inspection power.

SURVEILLANCE AUTHORITIES: For controlling tax evasion, we need to establish Surveillance authority for constant monitoring of the website' database by giving power of system hacking. Unless and until the surveillance authority is not established, it would not easy to verify the record keeping requirement of sellers of the website whom database is not hosted in Pakistan.

The establishment of the surveillance authorities shall be permanent body of tax machinery to provide vigilance facility to all transaction has been taken place by e-commerce, and if, any other service is sought of any independent computer forensic authorities, the responsibilities should be vested on the surveillance authority to receive reports from these computer forensics authorities.

These surveillance authorities often gave the power to hack the any system for sake of getting appropriate information for verification of record. Furthermore more we need to define the power the surveillance authority and should legislate the limit the powers enjoyed by these authorities for purpose mentioned above.

There need also appropriate co-ordination of the surveillance authority with Tax officer for smooth running of Tax machinery.


There must be anti-avoidance provision be incorporated in Sale Tax Act of 1990 in order to curb the avoidance of taxation by maintenance of e-record at remote web servers, and the above mentioned tools of avoidance be made part of the sale tax statute to halt any such evasive tendencies of taxpayers.

In the central excise duties rules specific amendment be made to incorporate, computer forensics, proposed vigilance authority as part of the tax structure so that the avoidance of the tax be minimized.

The similar types of recommendations are suggested in the Income Tax Ordinance 2001 for future legislation on income derived from electronic commerce sources so that rapid increase in e-business should be placed under tax net and its mitigation, evasion and avoidance of taxation be eliminated at desired level.

It is here concluded that anti-avoidance tools as used by various developed states for the purpose of curbing the avoidance of the taxation, for most important of them are computer forensics, vigilance authorities, and by making appropriate reconstructions of the tax statutes and lastly the avoidance of imposition of the double taxation by signing tax treaties with other states.

Author is a student of LL.M Programme in Quaid-e-Azam Law College Lahore Pakistan and conducting research "Legislation of Electronic Commerce Taxation in Pakistan".