Complaince of Tax Return in Electronic Commerce Taxation
Emerging Legal issues of Tax compliance of e-business Self-assessment system relies on taxpayers voluntarily meeting their tax obligations by tax payee. This concept is recognised in all tax statutes, which sets out taxpayers' primary obligations to fill tax return on self-assessment, and clearly spells out that taxpayers are required to determine the amount of tax payable correctly and to pay it on time. Disclosure in this context is introduced for two main purposes. First, it is necessary to provide information for audit selection. Secondly, disclosure is relevant for the purposes of the abatement of penalties. Taxpayers have a statutory obligation to disclose to the Commissioner in a timely and useful way all information required to be disclosed under the tax laws. Disclosure here covers items specifically required to be disclosed by statute, and items for which disclosure is required by the Central Board of Revenue Department.
For income tax, under section 26 of sale tax act 1990 and 114 of income tax ordinance 2001, the departments requires a complete statement of the taxable income of the taxpayer for the preceding year, together with such other particulars as may be prescribed. The department's disclosure expectations cover any requirements set out in a particular tax return, in the guide accompanying a particular tax return, or matters for which a specific disclosure form is prescribed. In the area of tax returns and compliance, electronic commerce has created new variations on old legal issues as well as new categories of legal issues. These developments require that practical techniques be employed to deal with these technological innovations. These technological developments touch on a wide range of legal issues affecting the filing of tax returns to audit selection.
The filing of tax return of e-business and furnishing evidence Electronic commerce is still developing and no electronic money system has yet achieved widespread usage. Nevertheless, it is important to consider these issues now since some issues may require that the needs of filing and providing of tax returns be considered tax returns of electronic commerce be modernized while electronic commerce systems are still under development, and related issues of the filing of tax return of e-business and furnishing evidence be also taken into consideration. Electronic commerce on the web can actually facilitate compliance with consumer disclosure requirements.
Identity of person liable to file returns A New Yorker cartoon once published two dogs sitting in front of a computer with a symbol on the Internet; nobody knows rather they are a dog or any other creature. Tax administrators face a similar issue. Under clause (a) subsection 1 of section 114 of Income tax Ordinance 2001 has make it obligatory on every person and company regarding filing of the tax return,"?subject to this Ordinance, the following persons are required to furnish a return of income for a tax year, namely (a)Every company and any other person whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year;"
Similar type of tax provision is available in section 26 of Sale Tax Act 1990 has make it obligatory on every person and company regarding filing of the monthly tax return,"?Every registered person shall furnish not later than the due date a true and correct return in the prescribed form to a designated bank specified by the Board, indicating the purchases and the supplies made during a tax period, the tax due and paid and such other information, as may be prescribed"
Under section 26AA of Sale Tax Act 1990 has make it obligatory on every person and company regarding filing of the Retail tax return, "?Every person required to pay turnover tax shall furnish a true and correct return in the prescribed form to the Office of the Collector having jurisdiction indicating the value of supplies made in tax period, the tax paid and such other information as may be prescribed."
Identification of the parties to a transaction is a necessary first step in determining what the tax liability is for the transaction and who is liable for any tax payable. In relation to e-commerce, special difficulties are encountered. Where any business transaction is done through an e-page, the tax authorities must be technological capable enough to link the website with the "real world" physical parties behind it. An e-page can easily conceal the true identity of the person benefiting from any business it does. On the Internet it is too easy to use a false identity and it is not currently feasible for tax authorities to independently verify a party's identity. This raises a number of legal issues because the identity of counterparty is important for numerous tax provisions . Similarly, unless tax administrations actively look for signs that existing businesses are involved in e-commerce the existence of a website and parties to transaction could remain undetected. Furthermore, websites can quite easily be set up offshore or offshore websites can "front" onshore business. It is imperative for CBR to encourage voluntary disclosure of websites used as part of the selling and, possibly, distribution functions of a business. As a modest first step, tax forms will need to be changed to ask about e-commerce and to get information about browsing address of e-page of any business selling on the internet.
Finally, how the tax returns and other documents are to be attached as provided in tax provisions, I have disclosed this issue in chapter on "e-record and booking keeping". Electronic cash and bank secrecy The developments in electronic payment systems have the potential to create "electronic money." Electronic money is a broad term, and just as electronic money systems differ in their technical features and it is also differ in the extent to which they create legal issues for tax returns. Depending on the type of system used, electronic money can caused various obstacles in way of compliance and it has an advantage or a disadvantage for collection of taxation. The use of electronic cash as a means of transacting internet business has been legalized by various state as an acceptable alternative to credit card payments.
"The use of digital or electronic cash in e-commerce transactions could lead to difficulties for Revenue auditors. Revenue auditors have traditionally had to grapple with the lack of controls associated with the cash economy. The increasing sophistication of business transactions and the development of a variety of payment methods have meant that cash payments have become a diminishing feature of business transactions." The electronic money poses serious threat to a tax evasion potential comparative to that created by paper money. This raises the issue of whether the evasion potential is manageable and what must be done to manage it. It is possible that the techniques that have been developed over time to combat tax evasion using paper money may not be workable combat evasion through electronic money. The Electronic money has made easy to deposit unreported income in a bank or other financial institution with fraction of time. As a result of electronic money's facility in transmitting large amounts of money with relative ease across the border, combined with the continued use of e-cash, the legal issues of an underground and unaccounted economy is likely to be exacerbated. Electronic money and the Internet substantially has increased the opportunities to open bank accounts, letterbox companies and trust accounts can be established abroad with relative ease and safety, and money can be transmitted anonymously. Such accounts are, of course, causing providing opportunity for tax evasion of home state by taking harbor in zero tax states.
Verification of identity and attached documents Verification of identity is also a problem for tax authorities, who want to be assured that the persons with whom they do business are who they claim to be . As a result, companies engaged in electronic commerce are developing "digital certificates" or "digital IDs" that can be used to verify a person's identity over the Internet ; and "Digital certificates" are issued by a trusted legal intermediary authorities who verifies the identity and documents of a tax payer and performs appropriate background checks, depending on the level of assurance to be granted. The simplest level verification granted by these is that an e-mail message was sent from an indicated address. The next level verifies the digital ID holder through online identity verification against a consumer database when time and place of e-transaction conducted by purchasers. The highest level verification is that the holder personally appears before a notary public to have a digital ID application notarized of digital document evidence after converting into paper base form. Once a person's identity has been verified, the certificate is created using public key encryption techniques, which makes it independently verifiable by the recipient and Immune from tampering it.
Providing evidence of record Under clause (a), (b) (c) (d) subsection 2 of section 114 of Income tax Ordinance 2001 has make it obligatory on every person and company regarding providing evidence of the records,
"?A return of income (a) shall be in the prescribed form; (b) shall state the information required by the form, including a declaration of the records kept by the taxpayer; (c) in the case of a person carrying on a business, shall include an income statement, balance sheet, and any other document as may be prescribed for the tax year; and (d) shall be signed by the person or the person's representative."
The validation of the details of any business transaction requires an ability to follow a similar audit trail as that which exists for conventional commerce. The following elements must therefore be present- access to the basic records related to a transaction must be available; and the integrity of those records must be authenticated. Taxpayers are required to keep accurate books and records , which are subject to examination by the income tax authorities in order to verify the income and expenses reported on the taxpayer's return.
"Although many taxpayers rely on computerized record keeping systems to a large extent, many transactions still originate as paper records which can be used to verify the accuracy of the electronic records. However, for taxpayers engaged in the sale of electronic goods or services, no paper records are likely to be created because customer orders are placed and fulfilled electronically and therefore the only record that exists of these transactions could be an electronic one. As all users of computers know, this creates the possibility for tax evasion and fraud because computerized records can be altered without a trace."
The "digital notarization" has been introduced in much state. This system has been developed which are intended to make it possible to verify that electronic documents and records have not been altered. Public key encryption scientific technique also permits a taxpayer to encrypt his financial records to prevent their examination on audit for evasion of taxation . It would seem that this should be treated no differently from failing to keep or destroying e-records because it is possible to alter or destroy it within fraction of time. Even taxpayers engaged in the sale of physical, as opposed to electronic, goods may soon receive orders and issue invoices electronically. Electronic "documents" must be verifiable by scientific legal authorities in order to minimize the potential for tax evasion.
Getting extrinsic aid in statutory construction The following extrinsic aid can assist us to erection of the legislative construction.
Existing provisions of tax returns
There is no existing tax provision for the tax compliance of e-business of every person and company whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year ;" Like income tax returns similar tax provision are available in sale tax and also in central excise duties
Defining evidential parameters
How we can maintain record and production of record can be placed before the court for adjudication of taxes disputes. I recommend that such a review should be undertaken at the same time as the review of return filing obligations. I also consider that if record-keeping requirements are increased, taxpayers should receive some education on the necessity for those requirements. To help in this matter, that is also noted that it would be eminently worthwhile to encourage taxpayers on their own initiative to maintain e-record relevant information considered by them in adopting a particular tax position.
Proposals for legislative construction
I recommends that section 114 of income tax ordinance 2001 and section 26 of sale tax act 1990, which states that taxpayers must disclose to the Commissioner in a timely and useful way all information required to be disclosed under the tax laws, should be amended to identify the different categories of required disclosures: information specifically required by statute, information required by the department in a prescribed form, and information requested by the department from specific taxpayers.
Generally, apart from required disclosures, taxpayers are not obliged to disclose information, but anything that is disclosed must not be misleading. Sanctions may be imposed for deliberately misleading disclosures, and taxpayers open themselves up to the risk that a deliberately misleading disclosure could suggest tax evasion on their part. Intent to evade may also be inferred from a failure to disclose relevant information regarding e-commerce transaction to the tax authorities. The risk also arises that defaults of this nature may preclude the application of a time bar.
E- filing of tax returns
No online e-filing of the tax return has yet been introduced in Pakistan. This modern device are used to encourage e-filing of tax returns in other words online tax returns but there are many problems are associated with e-filing of the tax returns. The electronic filing of the tax returns provide room for unauthorized users and unknown person filing of tax returns and attachment of documents as evidence often create more problems instead of increasing tax compliance turn over of the taxpayers.
Even for required disclosures, some real issues arise, including the way in which the obligations to disclose are affected by e-filing procedures, and the use of e-filing under self-assessment. It is sufficient that the information is on the taxpayer's own files and available for examination by the department. This acceptance leaves open, however, whether, and to what extent, availability must be within a reasonable proximity to the taxpayer's own tax-file. Clearly, that taxpayers and their advisers consider they may have to act in this way is unsatisfactory, as it defeats the benefits in efficiency contemplated by self assessment-filing.
Amending tax StatutesMy recommendations are that the phrase 'prescribed form' defined in sale tax , need further strict construction by additional statutory clauses defining the types of prescribed forms that have been made available for the taxpayer for filing of their tax returns. The similar strict construction of statute is required in Income Tax Ordinance 2001 by specifically defining the methods of filing returns .
It here concluded that Central Board of Revenue should prepare and send out to taxpayers guiding leaflet, or where appropriate their agents, forms which guide them through their key tax activities, and also act as a record for audit purposes. In forwarding the forms to taxpayers, the government must reconstruct the existing tax statutes to place the electronic taxable activities in consistent with above mentioned recommendations.
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'.
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