Electronic Commerce Taxation: Emerging Legal Issues – Part I

The CBR taxes the Pakistani source income of nonresident individuals and foreign corporations with respect to income that arises from a trade or business, however, Pakistan generally asserts jurisdiction only with respect to taxable income which is effectively connected with the conduct of a trade or business within the Pakistan.

Moreover, under income tax treaties which the Pakistan has entered into with other countries, the Pakistan generally asserts its right to tax the Pakistani source trade or business income of foreign individuals and corporations only when such income is attributable to a “permanent establishment” or “fixed base” in the Pakistan. The application of these basic principles of Pakistani income taxation to electronic commerce creates a number of problems. First, the question whether a foreign person engaged in electronic commerce is conducting a trade or business “in Pakistan” is difficult to resolve by reference to the traditional criteria for resolving that issue. The concept of a Pakistani trade or business evolved in the context of conventional commerce, which has typically been conducted through identifiable physical locations. As noted above, however, electronic commerce can be conducted through telecommunications and computer links that have no physical connection to the jurisdiction in which the income-producing activity occurs. Indeed, “from a certain perspective, electronic commerce doesn’t seem to occur in any physical location but instead takes place in the nebulous world of ‘cyberspace.’ “Consequently, even though a foreign person may engage in extensive transactions with Pakistani customers, and thus clearly be engaged in trade or business, it is not at all clear that such person is engaged in a trade or business in Pakistani—at least as that concept has generally been understood.

Second, even if a foreign person engaged in electronic commerce with Pakistan customers is deemed to be engaged in Pakistani trade or business, it may be even more problematic to suggest that such a person has a “permanent establishment” in the Pakistan in the many cases that will be governed by Pakistani tax treaties. A “permanent establishment” is generally defined as “a fixed place of business through which the business of the enterprise is wholly or partly carried on.”13 Since electronic commerce can be conducted without a fixed place of business in the Pakistan, income that might have been subject to Pakistani tax were it earned through more traditional commerce may escape Pak taxation when earned through electronic commerce. These jurisdictional issues have significant implications for the neutrality and administrability principles considered above. If income that a foreign corporation earns through electronic commerce will escape taxation either because it is not effectively connected with a trade or business “in Pakistan” or because the corporation lacks a permanent establishment in the Pakistan, it will offend neutrality principles to tax income generated by competing commerce carried on by foreign persons through conventional. Neutrality considerations would counsel in favor of similar jurisdictional rules for both forms of commerce. On the other hand, even if jurisdictional principles could be developed that would treat economically similar forms of commerce the same for income tax purposes regardless of their mode of delivery, it is not at all clear that such a rule would be administrable. To attempt to enforce a tax obligation against a remote service provider whose contacts with Pakistan are limited to electronic impulses passing through satellite links may exceed even the administrative capabilities of the Central Board of Revenue.


The e-commerce world, to decide question who own the right to legislate, adjudicate and enforce the taxation is most crucial concern. Legislation is first step to ultimate adjudication of the matter, but question arises who can legislate. The selling e-commerce transaction, the purchaser could be from any jurisdiction across the globe, rather the country who own jurisdiction over the purchaser have the right to construct statutory provision for imposition of taxation.Likewise the seller physical establishment and data encryption place also arise many tricky and crucial questions concerning the imposition of e-commerce taxation which are hard to answer in the light of scientific advancement of e technology.


The geographic location of a person vest where that person is a residing, however, physical location becomes almost meaningless when technology exists that enables individuals to carry out almost every facet of life in another jurisdiction while never actually physically leaving their geographic location even for a single day. A person could effectively make thousands of “trips” per year via the information highway to another jurisdiction without ever being subject to a border control mechanism.

The place in which the transaction has been taken place, the seller and buyer jurisdiction and location is primary principal on which the taxes can be imposed, but the location of the transaction is most formidable task.

The location of parties where they are residing, it could in within specific country jurisdiction or it could be any where, the parties are residing that arises the multi-jurisdictional issues.

The issue of jurisdiction has been defined in The clause (a) of subsection (1) of section 3 of Sale Tax Act, 1990, which has considerably has followed the definition of jurisdiction based on the territory and place of transaction as has enunciated in sale tax the ‘in Pakistan’ implies any thing within the territory of Pakistan. “…taxable supplies made in Pakistan by a registered person in the course or furtherance of any taxable activity carried on by him”.

Like wise the central excise duties Act 1944 also remained adhere to the jurisdictional issue to the definition of ‘in Pakistan’ which are considerable important to look at the wordings of statutory construction of the subsection 1 of section 3 of central Excise Duties Act, 1944 “…as on all excisable services, provided or rendered in Pakistan as and at the rates, set forth in first schedule.”

There is liberal definition of the statute is available in income tax ordinance 2001, let us look at the definition which has been enunciated in the income tax ordinance. “…Subject to the provisions of this Ordinance, the total income, in relation to any assessment year, or a person,- (a) who is a resident, includes all income from whatever source derived, which- (i) is received, or is deemed to be received, in Pakistan in the income year by, or on behalf of, such person; or (ii) accrues or arises, or is deemed to accrue or arise, to him in Pakistan during such year; or (iii) accrues or arises to him outside Pakistan during such year; (b) who is a non-resident, includes all income from whatever source derived, which- (i) is received, or is deemed to be received, in Pakistan in the income year by, or on behalf of, such person; or (ii) accrues or arises, or is deemed to accrue or arise, to him in Pakistan during such year;”Where the data encryption has been taken place, jurisdiction issues arise there, as we could understand the matter, because of e-commerce transaction, the location of parties difficult to deduct, under given circumstances, because of factors which I understand are how to configure out the exact location of the parties unless the ISPs and web hosting sites are not monitored?


Challenging for the policy maker to stop evasion and imposition of fair taxes on e-commerce transaction, but when the multi dimensional issue are invoked that could lead to imposition of double taxation or evasion of taxes. Unless the international co-operation is not sought to adopt desirable policy for the imposition of taxes, that can lead to imposition of double taxation.


Currently, for most taxes there is a legal requirement on a business that wishes to store records electronically to obtain specific permission from taxing authorities. The approval is given subject to compliance with conditions specified by Revenue. The advent of e-commerce is likely to accelerate the trend for business records to be held electronically. Indeed, it is possible that some traders through a lack of knowledge of the legal requirements are already storing records electronically without CBR approval. In current conditions the need for CBR approval for the storage of records electronically may be outmoded. To have confidence in the processes and methodology used to store records electronically, CBR could simply retain the power to promulgate acceptable standards of electronic record keeping for tax purposes. Legal changes to this effect should be considered urgently.

So what threat, if any, does electronic commerce pose to the right of privacy? Personal databases of customer information allow businesses to tailor their marketing strategy to suit the individual and pinpoint the type of person they wish to target. Problems arise when that company chooses to share the data with someone to whom we have not chosen to give data or when details are taken without our knowledge.

Technologies such as data mining have made it possible to use information much more productively. Misuse of personal data is not something that is limited to electronic commerce; we provide a great deal of information to various organizations on a daily basis. Again, a phobia about electronic commerce makes an appearance. Many high street stores provide in customer loyalty cards, with which our purchases can be monitored and we receive details of the latest offers, which might interest us. Why should information taken from web sites regarding our buying preferences be treated so differently? The online equivalent of a store loyalty card is a cookie. The disturbing fact about cookies is that they have been designed to operate without the user knowing they are there thus, could be said to be an invasion of privacy.

Cookies are tiny pieces of data which are sent by web servers and which can be placed on the user’s system for later retrieval. Cookies may be used perfectly innocuously, for example to find out if a visitor to a web site has been there before and thus show customized information. However, cookies placed on your computer may be combined with malicious JavaScript or other code or may be designed in such a way as to reveal other sites your computer has visited, allowing marketers to attempt to create a picture of your interests and lifestyle. Cookies can be disabled, but this has implications for interaction with the web site as messages constantly appear asking the user to enable the cookie, thus wasting time and money.

If consumers do not have control over the collection and use of their personal data, electronic commerce will facilitate the invasion of their privacy. Although several groups concerned with privacy have objected to the use of cookies there appears to be little chance of their use lessening in the immediate future.


The record can be hosting at any jurisdiction , and application of retention and maintenance of record often arise legal issues which could only solved according prevailing laws of the web hosting sites. The subsection 1 of section 22 Sale Tax Act 1990 only make it compulsory for the maintenance of the record at the business premises or registered place in Pakistan of all records of sellable transaction as provision of sale tax runs as follows; “? A registered person making taxable supplies shall maintain and keep at his business premises or registered office in English or Urdu language the following records of goods purchased and supplies made by him or by his agent acting on his behalf in such form and manner as would permit ready ascertainment of his tax liability during a tax period.”

But there is no specific statutory provisions are available for defining issues mentioned above.


There must be appropriate legislation embodiment for record keeping and maintenance of the record of web server, if the construction of statutory are not available that could provide ample opportunity for the tax payer to avoid the taxes.

The record keeping in electronic record only kept in net place within the premises of the business that can be easily accessible by the tax officer but real issue arise for ascertaining the taxable record of the sellable goods hosted in remote web server, Just look at The subsection 2a of section 22 Sale Tax Act 1990 “?The Board may, by notification in the Official Gazette, specify for any class of taxable persons registered under this Act to use such electronic fiscal cash registers as are approved by the Board in the manner as may be prescribed.”

There is liberal construction of the statutory provision of sale tax in subsection (3) in which it has confirmed the power to CBR to prescribe in such form and manner for keeping electronic data;”?Where a person who is required to maintain records under this Act may keep the record on electronic data in such form and manner as may be approved by the Board.”This construction of statute can not meet the legislative requirement for keeping record of remote server; here must be specific rules for keeping the records as to avoid legal issue of collection taxes.


There must be substantive provision, which could frame time and limitation in which the electronic record could be kept. Although the electronic records can be kept for more than one form but the application of the substantive provisions for the retention of record are difficult to implement them.

The production of electronic record for adjudication There are legal stands in the way for justice adjudication of legal issues is production of record before the courts, the way these records can be placed and who is going to certify the electronic record? The legislative construction of statute must provide the legal framework for resolving these legal issues so that just adjudication can be pronounced for settlement of e-records disputes.


There must be some authority which could certify the record kept by the tax payer, the establishment of authenticated authority is an essential for authentication and verification of records, no certification body has not yet established, although it has been proposed in Electronic Transaction ordinance 2002.


The must be minimum standard for the protection of records, the types of software used should be used? What type of measures should be taken for maintenance and destruction of e- records? The standards of liable must also be described in appropriate form so that the records can be kept appropriate electronic forms.


To assess the records at hosted remote retained out of the jurisdiction of Pakistan root many legal issues which are needed to be addressed. Hereinafter there is description of the emerging legal issue of access to e-records.The access to record in electronic data is one of most difficult issue where record has been kept in remote hosting place which requires authorization and permission of the taxpayer and web hosting site.

The statutory provision of section 25 of the sale tax the phrase ‘electronic data’ has been used to get access to database of the record but no specific direction is available.

Look at the section 25 of Sale tax Act 1990 “?A person who is required to maintain any record or documents under this Act or any other law shall, as and when required by an officer of Sales Tax, produce record or documents which are in his possession or control or in the possession or control of his agent; and where such record or documents have been kept on electronic data, he shall allow access to such officer of Sales Tax and use of any machine on which such data is kept.”

The detail provisions in section 175 income tax ordinance 2002 regarding access to e-records, “?In order to enforce any provision of this Ordinance (including for the purpose of making an audit of a taxpayer or a survey of persons liable to tax), the Commissioner or any officer authorised in writing by the Commissioner for the purposes of this section ? (a) shall, at all times and without prior notice, have full and free access to any premises, place, accounts, documents or computer;?(d) may, where a hard copy or computer disk of information stored on a computer is not made available, impound and retain the computer for as long as is necessary to copy the information required?”

These provision has reproduced at length of the Income Tax Ordinance 2001 for getting access to the e-record but the statute is itself is silence on the point of record of business which has been conducted by e-commerce, how the computer can be accessed by tax officer which has uploaded at remote web server, in light of this fact it can be easily concluded that these legislative construction are inadequate.

The legislative construction are more strict and explicit in defining the right to access of the tax officer for purpose of verify of record but as comparison with the Sale Tax Act 1990,where the statutory detail is missing.

The section 18 of Central Excise Duties Act 1944 runs as under, “?Search made under this act or any rule made there under carried out in accordance with provisions of the code of criminal Procedure (V of 1898), relating with respect to search and arrest made under this code.” There is also required the reconstruction of the statute of rule 96 of central duties rules 1945 regarding the special procedure for imposition of central excise duties on services. The Criminal procedure itself is ineffective before the emerging issue of the e-commerce transactions.

The writer is an advocate of High Court and practicing immigration and corporate laws in Pakistan since September 2001. He is a self employed and pioneer in research on electronic commerce taxation in Pakistan. His articles were published widely in the critical areas of cyber crimes, electronic commerce, e-taxation and various other topics. He wrote LL.M thesis on titled “Legislation of electronic commerce taxation in Pakistan” in which he provided comprehensive legal proposals for statutory reconstruction of tax laws for purpose of imposition of taxation on e-business in Pakistan. Currently he is conducting is research on topic ‘Electronic commerce taxation: emerging legal issues of digital evidence’.

Author can be contacted by Adil Law Company (Advocates and Immigration lawyers) Office No.3 2nd Flr Hafeez Chambers 85 The Mall Rd Lahore Pakistan Telephone: +9242-6306195 +9242- 6360108 Fax: + 9242 6360108 Cell: +92300 4254910 E-mail: adil.waseem@lawyer.com

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