Taxing Internet Economy

Yesterday I got a mail from Google that I have just two days to decide on renewing my 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 made me thinking that taxation of Internet Commerce are complex issues that Governments need to handle with the right policy decisions. They might appear to be small issues today, but very soon 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. 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 does not require 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 remains as to 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. 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. Infact 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.

Imagination and Innovation

Imagination and Innovation

A post on the FB page of my friend took me to this link on the techcrunch story of Apple and how its net worth is today more than that of Microsoft, HP and Dell combined. It sort of sounds unbelievable that the market cap of Apple today is close to $ 300 billion compared to $ 200 billion for Microsoft, $ 72 billion for HP and $ 30 billion for Dell. See this in the backdrop of a market cap of $ 400 billion of Microsoft ten years back when Apple was at $ 8 billion!

Last 10 years have been amazing for Apple. It has led the world with its imaginative and innovative products. In 1997, when Steve Jobs returned to “rescue” Apple, it had a market cap of just about $ 3 billion. For investors it has been a windfall. The apple stock has zoomed from about $ 5 then to about $ 326 now!! It’s a mind boggling growth story. How did this happen.
Over the last few years, Apple has launched 6 innovations that have proved to be game changers. These include the iPod, the mp3 player that began the decade of disruptive technologies. This was followed by the iTunes which allowed people to buy the music they like. Next was the iPhone, which remains the leader inspite of attempts by rival companies to come up with matching products. The AppExchange has applications for almost everything. Most of us might use only the free apps, but the kind of applications available are truly amazing. The Apple Store is another innovative way of marketing products and more than $ 2 billion worth of products have been sold through these stores. The iPad revolution has been another game changer disruptive technology which might prove to the end of the road for laptops and desktops.

When we look at Apple’s innovation model, it is apparent that it is not they just make beautiful products that work. It also integrates it with a complete business model. The example is integration of iTunes and AppExchange with the iPods, iPhones and the iPads. The approach of Apple to build platforms and hosting applications on a cloud is the way to go. It allows users to plug and play. It makes technology simple to use. Today 5 year olds can use an iPod and an iPad more easily than the XO laptop, designed by OLPC for kids!

The iCloud which has been announced by Apple will do what iTunes did to music. It should become easy to store and share pictures and documents. The ease of use and the convenient interface that Apple devices provide is unmatchable. I am sure in the next 10 years, tech companies will have to innovate if they have to match up to Apple’s story. Today the difference is market cap of Apple and Microsoft is $ 100 billion which is more than the combined worth of RIM, Nokia, eBay and Netflix or that of Amazon and Adobe combined!

Lets see how the game changes in the next 12 months. These are interesting times.