E-commerce refers to the paper-less business, exchange of information using electronic data interchange, electronic mail, electronic bulletin boards, electronic funds transfer and other network based technologies.

E-commerce involves using the Internet for "purchase and sale transactions" (the sale, lease, license, offer or delivery of property, goods, services or information). Because it involves numerous computers communicating at the speed of light, purchase and sale transactions are both instantaneous and often unidentified.

Since Internet protocol does not require disclosure of identity and often allows users to log in with little or no verification, it is nearly impossible to determine the name and location of the purchaser. Consequently, many transactions are anonymous.

E-commerce differs from mail order and telephone solicitation, the two most traditional forms of business using remote sellers, because those usually involve the delivery of goods by common carrier to and from a specific physical location.

In short, there is an actual delivery of property from an identifiable seller to an identifiable buyer. Whereas in case of e-commerce seller as well as buyer remain unidentifiable.

Since the first secure online retail transaction was carried out 10 years ago, when a CD was purchased, the E- Commerce has grown by leaps and bounds. Even though this type of commerce is in its infancy, volume of this business are touching staggering figure of 2 trillion dollars.

Absence of actual physical presence of seller, buyer and merchandise poses a serious threat to traditional taxation laws of the Income Tax and Sales Tax around the world, which cater for the situations where seller, buyer and goods are physically present.

The Europeans and Americans have already started working on it and they have formed the committees and working groups to look into the methods of taxing such businesses. The initial recommendations of these working groups are not encouraging for Pakistan and other such technologically under-developed countries.

These committees mostly propose methods for charging of sales tax on consumers and altogether ignoring the income of companies and business houses.Every country needs to enact its indigenous legislation, which is not only just and equitable but also fully tuned with global trends.

Before examining the compatibility of existing laws and requirement of new laws in Pakistani perspective one needs to understand the technicalities of e-commerce and supporting cyber system behind it.

Suppose a person A buys a pair of Italian shoes from a shop in Karachi for a price of $100. In this situation buyer pays sales tax and the seller the income tax. Now lets suppose we open an Internet site for shopping and select same pair of Italian shoes of worth $100 and click a buy.

The next moment site asks about credit card number, you provide number and you get delivery from country X in next 72 hours. In an extra- territorial transaction, where an unknown person sitting in, say LaLa Moosa buys a pair of shoes from country X, through his or his friend's credit card. Contrary to above in this situation, buyer does not pay any sales tax and seller does no pay any income tax.

This very simple illustration makes a strong case for taxing e-commerce. Therefore non-taxing of e-commerce not only alienates state from its right of taxation but also creates inequality in the system, where a shopkeeper is subjected to tax but a foreign seller does not pay any tax.

A foreign company in this transaction, earns net profit of lets say $10. Should the government of Pakistan not be taxing this income? If yes, then, are the existing provisions of law sufficient to cater for such situations or we need to come up with updates in existing law or introduction of new laws. Precisely, it is the challenge, which governments are facing around the world.

In order to tax e-commerce we need to understand the technical background of transaction and the background may not be so simple. Lets say, shoes are made by a company Y of a country X and they are purchased by Pakistani customer from the company web site.

The company Y has not entered into Pakistan to do any business, what the customer is seeing on screen is not product itself but digital image of product launched on Internet. Moreover, the Internet must be having a server. Lets say server is located in Dallas (America). In this situation there is a system which has multiple users, among them one is company Y other is a Pakistani buyer, Where one is selling, the other is buying. Now the taxman will be interested in the location of transaction.

The question arises, whether transaction took place in country X, where seller is located or in Pakistan where the buyer is located or in America where the server of whole system is located.

Server country can claim that transaction is nothing but processing of information, since processing took place in his country therefore he should be taxing it. The seller country will claim that actual product was available in his country and therefrom it was dispatched, hence transaction took place in seller country, consequently it be taxed there.

Consumer country has also a valid case. It can claim that money was remitted form its country; hence it is the country where transaction took place. How do the Pakistani legislation view this situation? As per the Constitution of Pakistan no person can be taxed except in accordance with law. Therefore in order to examine the taxability of such transactions we need to look into the existing provisions of Income tax Ordinance 2001.

As per section 101, subsection (3): 'Business income if a non-resident person shall be Pakistan -source income to the extent to which it is directly or indirectly attributable to: (a) a permanent establishment of the non-resident person in Pakistan; (b) sales in Pakistan of goods, merchandise of the same or similar kind as those sold by the person through a permanent establishment in Pakistan; (c) other business activities carried on in Pakistan of the same or similar kind as those effected by the non -resident through a permanent establishment in Pakistan; or (d) any business connection in Pakistan.

Clauses (a), (b) and (c) suggest there should be a permanent establishment of non-resident in Pakistan and a business be carried by the permanent establishment and such business shall be treated as Pakistan-source income.

Moreover if there is establishment doing a business and company does same or similar business directly without involving permanent establishment it shall also be treated as Pakistan-source income. But what about the cases where there is no permanent establishment, rather due to support of technology they do not need to have any permanent establishment, like in case of e- commerce.

Now the principles of taxation on the basis of permanent establishment have become highly questionable in view of e-commerce. Globally it is being debated that new elements like location of server and location of end user be also taken into account.

In new scenario taxation on basis of permanent establishment favours exporting countries and taxation on basis of location of server favours technologically advanced countries.

Therefore, countries like Pakistan should emphasize upon the taxation based upon location of the end-users. The scope of definition of clause (d) of sub-section (3) of section 101 of Income Tax Ordinance, 2001 (any business connection in Pakistan) need to be enhanced with the explanation to cater for such transactions and arrangements be made to collect withholding tax while remitting money from the country.