Unit5 Ecom
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UNIT 5 ELECTRONĐC PAYMENT SYSTEMS (EPS) PAYMENT SYSTEMS (EPS) Issues of trust and acceptance play a more significant role in the e-commerce world than in traditional businesses as far as payment systems are concerned. Traditionally, a customer sees a product, examines it, and then pays for it by cash, check, or credit card (Figure 4.1). In the ecommerce world, in most cases the customer does not actually see the concrete product at the time of transaction, and the method of payment is performed electronically.
EPSs enable a customer to pay for the goods and services online by using integrated hardware and software systems. The main objectives of EPS are to increase efficiency, improve security, and enhance customer convenience and ease of use. Although these systems are in their immaturity, some significant development has been made. There are several methods and tools that can be used to enable EPS implementation (Figure 4.2)
While customers pay for goods/services by cash, check, or credit cards in conventional businesses, online buyers may use one of the following EPSs to pay for products/services purchased online: • Electronic funds transfer (EFT): EFT involves electronic transfer of money by financial institutions. • Payment cards : They contain stored financial value that can be transferred from the customer's computer to the businessman's computer. • Credit cards : They are the most popular method used in EPSs and are used by charging against the customer credit. • Smart cards: They include stored financial value and other important personal and financial information used for online payments. • Electronic money (e-money/e-cash): This is standard money converted into an electronic format to pay for online purchases. • Online payment: This can be used for monthly payment for Internet, phone bills, etc. • Electronic wallets (e-wallets) : They are similar to smart cards as they include stored financial value for online payments. • Micro-payment systems : They are similar to e-wallets in that they include stored financial value for online payments; on the other hand, they are used for small payments, such as kurus in Turkey . • Electronic gifts : They are one way of sending electronic currency or gift certificates from one individual to another. The receiver can spend these gifts in their favorite online stores provided they accept this type of currency. Although these groups appear to be separate, there is some overlap among them. When the industry matures, this duplication in naming and function ought to be renamed. For example, ewallets can be classified as payment cards when they are used to store credit card information or as e-money when they store electronic currency. The standardization of payment mechanisms on the Internet is essential to the success of ecommerce. Businesses offering domestic and international services must have assurance that payment will be received, that it is secure and that it is valid. Addressing security issues is crucial to the acceptance of online payment standards: consumers and merchants must be able to trust that their information is kept intact and remains secure during transmission. SET and SSL are two standards that protect the integrity of online transactions. 4.2 ELECTRONĐC FUNDS TRANSFER (EFT) Electronic funds transfer is one of the oldest electronic payment systems. EFT is the groundwork of the cash-less and check-less culture where and paper bills, checks, envelopes, stamps are eliminated. EFT is used for transferring money from one bank account directly to another
without any paper money changing hands. The most popular application of EFT is that instead of getting a paycheck and putting it into a bank account, the money is deposited to an account electronically. EFT is considered to be a safe, reliable, and convenient way to conduct business. The advantages of EFT contain the following: • Simplified accounting • Improved efficiency • Reduced administrative costs • Improved security PAYMENT CARDS 4.3 PAYMENT CARDS Credit cards, debit cards, charge cards, smart cards are payment cards. They are the most popular tool for electronic payment transactions. Credit Cards There are two types of credit cards on the market today: • Credit cards issued by credit card companies (e.g., MasterCard, Visa) and major banks (e.g. Is Bankasi, Ziraat Bankasi, Yapi Kredi, etc.) Credit cards are issued based on the customer's income level, credit history, and total wealth. The customer uses these cards to buy goods and services or get cash from the participating financial institutions. The customer is supposed to pay his or her debts during the payment period; otherwise interest will accumulate. Two limitations of credit cards are their unsuitability for very small or very large payments. It is not cost-justified to use a credit card for small payments. Also, due to security issues, these cards have a limit and cannot be used for excessively large transactions. • Credit cards issued by department stores (e.g Boyner), oil companies (e.g. Shell) Businesses extremely benefit from these company cards and they are cheaper to operate. They are widely issued to and used by a broad range of customers. Businesses offer incentives to attract customers to open an account and get one of these cards. Debit Cards The difference between credit cards and debit cards is that in order to pay with a debit card you need to know your personal identification number (PIN) and need a hardware device that is able to read the information that is stored in the magnetic strip on the back [3]. Debit cards task similar to checks in that the charges will be taken from the customer's checking account. The benefit for the customer is the easiness of use and convenience. These cards also keep the customer under his or her budget because they do not allow the customer to go beyond his or her resources. The advantage to the merchant is the speed at which the merchant collects these charges. Charge Cards
Charge cards are similar to credit cards except they have no revolving credit line, so the balance must be paid off every month. Credit, debit, and charge card methods of payments have been successfully utilized in the pre-Internet period, and they are often used in the e-commerce world as well. Some of the reasons for their popularity in the e-commerce world are their availability (most customers own one of these cards), ease of use, and acceptance. To use these cards as an online payment system, a well-defined process is followed. A brief description follows. To accept payment cards payments, a merchant must have a merchant account with a bank. The buyer will be required to submit their credit-card number, expiration date and shipping and billing information when making a purchase online using a payment card. (Figure 4.3) A customer using his/her browser clicks on a product on the merchant's web site and adds it to an electronic shopping cart. The customer provides the shipping instructions and payment card information. This information is sent securely over the Internet to the merchant's commerce site (Step 1). The server software adds the merchant identification to the information transmitted. The merchant then submits this information to the acquiring bank with which the merchant holds an account (Step 2). The merchant bank transmits this information to the customer's bank for authorization. Then, the buyer's account information is verified. This involves the issuing bank from which the buyer obtained the credit card, and the credit-card association (Step 3). Verification is received by the acquiring bank (Step 4) and is passed on to the merchant (Step 5) who then ships the product (Step 6). Payment cannot be issued to the merchant until the product has been shipped. This entire process (not including shipment) takes approximately less than 30 seconds [2]!
Smart Cards A smart card is about the size of a credit card, made of a plastic with an embedded microprocessor chip that holds important financial and personal information. The microprocessor chip is loaded with the relevant information and periodically recharged. In addition to these pieces of information, systems have been developed to store cash onto the chip. The money on the card is saved in an encrypted form and is protected by a password to ensure the security of the smart card solution. In order to pay via smart card it is necessary to introduce the card into a hardware terminal. The device requires a special key from the issuing bank to start a money transfer in either direction. Smart cards can be disposable or rechargeable. A popular example of a disposable smart card is the one issued by telephone companies. After using the pre-specified amount, the card can be discarded. Smart cards have been extensively used in the telecommunications industry for years. Smart-card technology can be used to hold information on health care, transportation, identification, retail, loyalty programs and banking, to name a few. Smart cards enable information for different purposes to be stored in one location. The microprocessor chip can process different types of information, and therefore, various industries use them in different ways. Due to their multipurpose functions, their popularity in Turkey is also on the rise. Smart cards are broadly classified into two groups: Contact: This type of smart card must be inserted into a special card reader to be read and updated. A contact smart card contains a microprocessor chip that makes contact with electrical connectors to transfer the data. Contact-less: This type of smart card can be read from a short distance using radio frequency. A contact-less smart card also contains a microprocessor chip and an antenna that allows data to be transmitted to a special card reader without any physical contact. This type of smart card is useful for people who are moving in vehicles or on foot. They are used extensively in European countries for collecting payment for highway tolls, train fares, parking, bus fares, and admission fees to movies, theaters, plays, and so forth. Smart cards can accommodate a variety of applications that allow the customer to make purchases from a credit account, debit account, or stored value on the card. These cards can even have multiple applications operating at the same time. The customer, for example, could have a frequent flyer program working on the same card as the customer debit or credit account. This enables the customer to earn points in his or her favorite program. Several computer manufacturers (e.g. Compaq) are developing keyboards that include smart card slots that can be read like bank credit cards. A smart card can be programmed for different applications. Some cards contain programming and data to support multiple applications, and some can be updated with new applications after they are issued. IBM, Microsoft, Schlumberger, and Bull are among the major players in smart card development and utilization [1]. Some of the advantages of smart cards include the following: • Stored many types of information • Not easily duplicated • Not occupy much space
• Portable • Low cost to issuers and users • Included high security The disadvantages of smart cards are the lack of universal standards for their design and utilization. On the other hand, smart card applications are expected to increase as a result of the resolution of these disadvantages in the near future. 4.4 ELECTRONĐC CASH (E-CASH) Similar to regular cash, e-cash enables transactions between customers without the need for banks or other third parties. When used, e-cash is transferred directly and immediately to the participating merchants and vending machines. Electronic cash is a secure and convenient alternative to bills and coins. This payment system complements credit, debit, and charge cards and adds additional convenience and control to everyday customer cash transactions. E-cash usually operates on a smart card, which includes an embedded microprocessor chip. The microprocessor chip stores cash value and the security features that make electronic transactions secure. Mondex, a subsidiary of MasterCard (Mondex Canada Association) is a good example of e-cash. E-cash is transferred directly from the customer's desktop to the merchant's site.Therefore, e-cash transactions usually require no remote authorization or personal identification number (PIN) codes at the point of sale. E-cash can be transferred over a telephone line or over the Web. The microprocessor chip embedded onto the card keeps track of the e-cash transactions. Using e-cash the customer has two options: a stand-alone card containing e-cash or a combination card that incorporates both e-cash and debit . How a typical e-cash system works: A customer or merchant signs up with one of the participating banks or financial institutions. The customer receives specific software to install on his or her computer. The software allows the customer to download “electronic coins” to his or her desktop. The software manages the electronic coins. The initial purchase of coins is charged against the customer's bank account or against a credit card. When buying goods or services from a web site that accepts e-cash, the customer simply clicks the “Pay with e-cash” button. The merchant's software generates a payment request, describing the item(s) purchased, price, and the time and date. The customer can then accept or reject this request. When the customer accepts the payment request, the software residing on the customer's desktop subtracts the payment amount from the balance and creates a payment that is sent to the bank or the financial institution of the merchant, and then is deposited to the merchant's account. The attractive feature of the entire process is its turnaround time which is a few seconds. The merchant is notified and in turn ships the goods. 4.5 ELECTRONĐC CHECKS (E-CHECK) E-check is the result of cooperation among several banks, government entities, technology companies, and e-commerce organizations. An e-check uses the same legal and business protocols associated with traditional paper checks. It is a new payment instrument that combines high-security, speed, convenience, and processing efficiencies for online transactions. It shares the speed and processing efficiencies of all-electronic payments. An e-check can be used by
large and small organizations, even where other electronic payment solutions are too risky or not appropriate. The key advantages of e-checks are as follows: • Secure and quick settlement of financial obligations • Fast check processing • Very low transaction cost E-check is being considered for many online transactions. E-WALLETSLECTRONĐC WALLETS (E-WALLETS) Electronic wallets being very useful for frequent online shoppers are commercially available for pocket, palm-sized, handheld, and desktop PCs. They offer a secure, convenient, and portable tool for online shopping. They store personal and financial information such as credit cards, passwords, PINs, and much more. To facilitate the credit-card order process, many companies are introducing electronic wallet services. E-wallets allow you to keep track of your billing and shipping information so that it can be entered with one click at participating merchants' sites. E-wallets can also store echecks, ecash and your credit-card information for multiple cards. A popular example of an e-wallet on the market is Microsoft Wallet . To obtain Microsoft Wallet, one needs to set up a Microsoft Passport. After establishing a Passport, a Microsoft ewallet can be established. Then, e-wallets can be used for micro-payments. They also eliminate reentering personal information on the forms, resulting in higher speed and efficiency for online shoppers. Microsoft Passport consists of several services including the following [5]: A single sign-in, wallet and kids passport services. A single sign-in service allows the customer to use a single name and password at a growing number of participating e-commerce sites. The shopper can use to make fast online purchases with a wallet service. Kids' passport service helps to protect and control children's online privacy. 4.7 MĐCRO-PAYMENT Merchants must pay a fee for each credit-card transaction that they process; this can become costly when customers purchase inexpensive items. The cost of some items could actually be lower than the standard transaction fees, causing merchants to incur losses. Micro-payments are used for small payments on the Web. The process is similar to e-wallet technology where the customer transfers some money into the wallet on his or her desktop and then pays for digital products by using this wallet. Using micro-payment one will be able to pay for one article from a professional journal, a chapter from a scientific book, or one song from a CD on the Web. There are many vendors involved in micro-payment systems. IBM offers micropayment wallets and servers. IBM micro-payment systems allow vendors and merchants to sell content, information, and services over the Web. It provides universal acceptance and offers comprehensive security. This micro-payment system can be used for billing by banks and financial institutions, Internet service providers (ISPs), content providers (offering games, entertainment, archives, etc.), telecommunications, service providers (offering fax, e-mail, or phone services over the Web), and by premium search engines and specialized databases.
A number of companies will allow for outsourcing the payment-management systems. Many of these systems can handle multiple payment methods including micro-payments. Qpass is an example of a company that can manage micro-payments for payper-download, subscriptionbased and pay-per-click systems. Qpass enables periodicals such as The New York Times and The Wall Street Journal to offer subscriptions over the Web. Customers who buy products and services through a Qpass-enabled company receive monthly bills that include descriptions of all purchases made during that month. Additional services offered by Qpass include the Qpass Power Wallet, which registers passwords, credit-card information and other preferences necessary to make online transactions more efficient customer service marketing and sales assistance (Figure 4.4).
The legal environment of electronic commerce Introduction The global spread of Internet creates favourable conditions for the growth of electronic commerce. At the same time, this is a challenge to the legal framework of many countries because the legal framework is insufficiently flexible or insufficiently specific in regulating the new relations between business entities. The Internet commerce presents the following problems to the legal framework of states: Distance transactions. More often than ever before the buyer-seller relations are losing direct contact. On the Internet it may happen that neither party to the transaction knows about the transaction until it is due to be performed, let alone have the written form of the transaction. New conditions and forms for the validity of transactions are necessary. It is also imperative to have means how to define the liability of the parties. Payments. New payment methods and means have emerged in the public environment of the wide world web. Almost every transaction of this kind involves, in addition to the buyer or
seller, their banks and the operators of the payment systems, if any. Since the number of frauds through the use of electronic payment means is quite considerable these days, the liability of each party must be unambiguously defined. International aspects. Although electronic commerce does not recognise national borders, they are still recognised by commercial law. The existing specific legal acts, taxation rules and restrictions on imports and exports still remain an important, slow moving issue to lawyers Consumer protection. The population requires guarantees that the presentation of goods and services on the Internet should conform to their qualities, that the buyer should be entitled to return the acquired defective product, that the consumer should be protected against undesired advertising or against the improper use of his/her personal data. Protection of trade marks, Internet and intellectual property. The territory-bound character of law related to these forms of property runs counter to the realities of the cross-border nature of the Internet, while the digital form of many products distributed in the cyberspace is especially vulnerable to illegal copying. Law of the European Union The directives of the European Parliament and the Council are not directly applicable in the jurisdiction of the member states, but their national laws should be harmonised with the directives. Although the EU legal acts related to electronic commerce are determined by the member states, the most important provisions of commercial law are laid down in the directives of the European Parliament and the Council (which may be ratified by the Parliaments of the member states) in order to simplify the movement of money and goods in the internal market. In the attempt to improve its legal acts, including the acts on electronic commerce, Lithuania is using EU commercial law as a model. Reference to the most important documents and their main provisions the reader will find in the following pages. Directive on distance transactions The Directive on Distance Transactions, adopted in 1997, regulates the principles of consumer protection in respect of transactions made without a physical contact of the parties: by telephone, post, electronic means. The main provisions of the Directive are the following: Confirmation of the transaction. After the conclusion of the transaction, the consumer should receive a confirmation in the medium acceptable to both parties (e. g. by e-mail or on paper). Right of revocation. The consumer is entitled to withdraw from the transaction within 7 business days without any penalty or requirement to produce reasons.
Full information. The seller must inform the buyer beforehand of the exact prices for the goods and services offered (as well as any other charges), their validity date, delivery costs and their precise qualities. Prohibition on inert transactions. Transactions which are not sanctioned by the consumer are prohibited even if the consumer has been informed of the ways how he may withdraw from the transaction. Directive on electronic commerce This latest legal act specially designed for digital business lays down, among other things, the requirements for the provider of information society services (ISS) and the regulatory principles of his business: Identification. The parties must ensure that information on the ISS provider’s, established on their territory, name, postal and e-mail addresses, registration and VAT code should be easily accessible to consumers and competent institutions. Commercial correspondence. If the IVP consists, in part or in whole, of material of advertising nature, the service provider must identify it explicitly as such and indicate the natural person or legal entity represented by it. The same is applicable to rebates, games, special offers, gifts, etc. The Directive requires that member states should control the unapproved sources of commercial correspondence distributed via e-mail within their legal framework. Electronic transactions. Member States must ensure that their laws should provide for the validity of electronic commercial transactions. The service provider must inform, clearly and unambiguously, the service recipient of all the technical steps necessary to make the transaction. After the conclusion of the transaction the service provider must issue the confirmation/receipt of the transaction. Throughout this process, up to the last stage, the recipient of the service must have the possibility of withdrawing from the transaction or correct any mistakes. The responsibility of the communications intermediary. Electronic communications intermediaries, i. e. the providers of services of Internet communications and telecommunications operators, are not responsible for the content transmitted or placed by using their services or for the transactions made. The electronic communications intermediaries are not obliged to monitor the transmitted or saved information for possible illegal activities. Directive on the harmonisation of copyright and related rights in the information society (draft) So far, the vast possibilities for the distribution of music and video works on the Internet have been hampered by the equally vast digital pirating wave. This document, which is under deliberation in the European Parliament, meets the requirement of the amusement industry to
guarantee copyright and the protection of technologies used to assure the copyright. However, the directive still permits to make copies exclusively for personal use, but only by analogue technology (i. e. copying from a CD to MP3 would be illegal). In addition, illegal are programmes and means designed to "break" the anti-pirate protection. Other acts In addition to the documents mentioned above, there are several other EU legal acts which affect the environment of the Internet business. •
Directive on electronic monetary institutions, draft
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Recommendation on electronic payment instruments
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Directive on electronic signatures Situation in Lithuania
With a view to codifying the legal environment of electronic commerce in Lithuania, the Government has taken measures to draft a package of legal acts to encourage retail and businessto-business electronic commerce. This package is drafted according to the respective EU norms. However, considering the general character of EU directives, the legislation is drafted so as to include more specifically defined requirements, liabilities and responsibilities. The Law on Electronic Signature The only effective legal document specifically designed for electronic data communications is the Law on Electronic Signature, adopted in 2000. Its text is very similar to the EU Directive on electronic signatures, however, it also includes some new provisions. The electronic signature is a special supplement, formed by a cryptographic algorithm, to a digital document. It is inseparable from the content of the document and the electronic certificate of its author. The purpose of the electronic signature, just as that of a conventional signature, is to ensure the authenticity of the document’s author and contents. The recipient of the document uses another algorithm which compares the digital signature to the document and its author’s public certificate. This algorithm recognises if the text of the document has been modified without using the original certificate. The Law regulates the procedure for the formation of the electronic signature, equipment and the activities of institutions responsible for the issuance of electronic certificates. For example, any natural person or legal entity may issue electronic certificates for its own needs or the needs of its clients, but only the qualified certificates have the legal validity of a written signature. "A secure electronic signature, created by a secure equipment used for the formation of the signature, and certified by a valid qualified certificate, shall have the same legal validity as a signature on written documents, and shall be admissible as a evidence before court" (8.1.a
Article). However, subparagraph 2 of the same Article says that the instruments and procedure for the formation of an electronic signature as such may not be pleaded as grounds for doubting the power of proof – other objective criteria must be submitted to the court. The State Electronic Signature Supervisory Authority is responsible, among other things, for the accreditation of the service providers and the determination of the main procedural and technical requirements for qualified certificates. The Law does not regulate the rules as to when the electronic form of the documents is admissible or for what purposes. This is left for the regulation by further statutory and regulatory acts, but we can predict that the provisions of this Law will be important for the realisation of EDI and business-to-business electronic commerce, i. e. for the area where the documents signed electronically may be used. Protection of intellectual property The Republic of Lithuania has acceded to the Berne Convention on the protection of literary and artistic works (the Paris version) and the Madrid international agreement relating to trade and service marks (the Nice version). The existing Law on the Legal Protection of Software and Databases is sufficiently well adapted for the protection of the design of Internet homepages and software from illegal copying. The protection of all other forms of intellectual property is guaranteed by the Civil Code of the Republic of Lithuania. Documents under development or deliberation Amendments to the Civil Code provisions related to contract law. Articles 41-45 of the existing Civil Code of the Republic of Lithuania defines the written and oral forms of contracts between persons. In the electronic market this choice is limited, therefore the new draft of paragraph 2 Article 1.73 of the First Book of the Civil Code 1.says that "Document in written form shall be equated to a document signed by the party and transmitted by telegraph, fax or other instant communication means provided that the protection of the text is ensured and it is possible to identify the signature." The formulation of this provision provides a basis for the application of the provisions of the Law on Electronic Signature in respect of civil transactions. The Law on Electronic commerce. A draft of this law is being developed by the Department of Information and Informatics of the Ministry of Public Administration Reforms and Local Authorities on the basis of the EU directive on electronic commerce and the UNCITRAL model law. The Law, when adopted, will define the legal validity and scope of application of any electronic transaction; it will also determine common requirements for commerce on the Internet. Legislation problems
In order to adapt the Lithuanian legal framework to the needs of the Internet business, it is necessary to establish what kind of legal acts are missing and which existing legal acts contradict the fundamental principles of electronic commerce. Here are some of the most important issues. Liability of the parties to the electronic settlement. Electronic payments date back much earlier than electronic commerce. They have their roots in banking technologies and the EDI systems of the ‘80s. Since then, the relations between the parties of the settlement have been regulated by direct agreements or bilateral agreements between a company and the network operator (e. g. S.W.I.F.T.). Such legal environment is still satisfactory to many EDI parties. There is no infrastructure for direct electronic payments in Lithuania, except for banks, public institutions and financial service companies. However, there are two new factors which require a better definition of the norms applicable to electronic settlements. First, electronic settlements have become a consumption commodity therefore it requires an appropriate programme for consumer protection. Second, settlements have moved to the Internet where there is no single operator or mandatory rules. In the rectangle "Purchaser – the purchaser’s bank – the seller’s bank – the seller" liabilities of each party must be defined in respect to possible damages through its own or a third party’s fault. If the national legal acts do not provide for such liabilities, it is quite likely that mass consumers will become the most vulnerable link in these multilateral relations. The EU recommendation on electronic payment instruments is a model for the state to follow in attempts to ensure the protection of the consumer from unrestrained civil sanctions. Internet domain names A lot of experts agree that the names of Internet domains are a form of property similar to a trade mark. Therefore, this fact should not be neglected in trade mark law. On the other hand, the territory-related and specificity principles of trade mark law contradict the procedure of the formation and use of domain names. So, strictly speaking, a domain name as such may not get the same protection as is applied to trade marks. Ownership disputes over domain names and attempts at selling prestigious domain names have become a reality in Lithuania. So far, the status of a domain name as property and its legal protection has not been regulated, while domain names are often provided by organisations whose activities are not regulated by any legal act, except for the internal rules of the register. Accounting documents Subject to the EU directives, the receipt/confirmation of a transaction is an essential instrument of electronic commerce. However, taking into consideration the peculiarities of the Internet, the
Directive on Distance Transactions permits any "reliable" form of the receipt, i. e. it can be presented by e-mail, on a diskette or on paper. Article 9 of the Law on the Fundamentals of Financial Accounting of the Republic of Lithuania provides for a strictly defined form of confirmation. It is emphasised that "companies shall support their business transactions, except for telecommunications services for mass consumption, with accounting documents." However, "transactions, including the telecommunications services delivered for mass consumption, which, under the procedures established by the Government of the Republic of Lithuania, are not required to use special accounting documents, shall be supported by documents drawn up in the model or free form. The Government has established a procedure for the exemption of certain sales groups from special accounting documents, but the list of such groups does not include electronic sellers. At present, businessmen engaged in electronic commerce deliver the invoice to the buyer together with the purchased product, while for ISS providers and users, who do not communicate in any other way except electronic communication (e. g. paid information services on the Internet), this method is too complicated. A proposal has been submitted to the Government to define the same accounting rules for ISS providers which are applicable to the providers to telecommunications services. THE ENVIRONMENT OF ELECTRONIC COMMERCE: LEGAL, ETHICAL, AND TAX ISSUES The Legal Environment of Electronic Commerce Š Online businesses „ Must comply with the same laws and regulations that govern the operations of all businesses „ Face complicating factors Web extends a company’s reach beyond traditional boundaries z Web increases speed and efficiency of business communications Web creates a network of customers
Borders and Jurisdiction Š Territorial borders in the physical world mark the range of culture and reach of applicable laws very clearly Š European Union (EU) „ Allows free movement within the EU for citizens of member countries „ Adopted a common currency
E-commerce occurs in various forms and between various entities in the market. One among the question faced by nations is how to tax it. As the internet crosses the boundaries the main challenges are how the basic requirements of physical presence can and substantial nexus criteria
of taxation can be met. The article tries to analyze the key issues in the area of e-commerce taxation. Article alarms the nation that if it is left untaxed it will give rise to a parallel economy. Every industry contributes to the nations economic growth. The communications industry has become very significant and is promising to grow enormously in the near future. Unlike other communication media, Internet is facilitating access to knowledge bank, in competitive market and rendering services of world class standard. E-commerce offers a new way of conducting, managing and executing business transactions using modern information technology. It has redesigned the traditional mode of business. As a whole, it is a business practice that involves use of computers, computer systems or computer networks1. E-commerce occurs in various forms and between various entities in the market . The question is how to tax it. As the Internet has crossed borders (sovereignty) how can the requirements of physical presence and substantial nexus criteria of taxation be met.Due to the uniqueness of ecommerce, taxation faces a number of problems. This articles tries to find out the key issues in the area of e-commerce taxation and tries to analyse the existing regime with regard to the e commerce taxation. It is also alarmed that if this is left untaxed , it will give rise to a parallel economy. Definition of E-commerce According to Greenstein and Ferman3 "electronic commerce (e-commerce) is defined as the use of electronic transmission medium ( telecommunication) to engage in the exchange, including buying and selling of products and services requiring transportation either physically or digitally from location to location." E-commerce is any transaction completed over a computer-mediated network that involves the transfer of ownership or rights to use goods or services. According to European Commission4, ecommerce encompasses more than the purchase of goods online. It includes a disparate set of loosely defined behaviours such as shopping, browsing in Internet for goods and defined behaviours, gathering information about items to purchase and completing the transaction like any other sustained business activity. It also means conducting consumer satisfaction surveys, capturing information about consumers and maintaining consumer databases for marketing promotion and other related activities. The first phase of e-commerce threw up a new business nomenclature using various combination of business and consumers5. It has its own advantages and disadvantages6 as in traditional business methods. Thus, e-commerce has necessarily changed the world economy in a dynamic and interactive pattern. Taxation for Internet Transaction The Internet has changed many of the fundamental and long standing concepts of direct and indirect taxation. Governments all over the World are grappling with the various issues of taxation raised by e-commerce. This is because of lack of comprehensive understanding of: • The communication technologies
• The complex nature of business offered through Internet business, etc. • The modus operandi of Internet business, etc. has made the operation of tax legislations more difficult. The Information Technology Act, 2000, which is the first legislation to deal with e-commerce is quite silent about tax system. Substantial amount of state revenue which is generated through direct and indirect taxes is lost when Internet transaction remain untaxed7. A way is to be found to tackle this relevant problem. Basic Principles of Taxation Several basic principles form the foundation of taxation policy in any country. The most important of these principles are efficiency, equality, certainty and positive economic effect8. If the tax system disregards these principles it is fatally defective. The efficiency principle encompasses notions of both fiscal and economic efficiency. An economically efficient tax system should be neutral and not influence one's economic behaviour simply because of the manner in which the tax is levied. An ideal tax system is also equitable in its application. Not only does it treat taxpayers in similar economic circumstances9similarly but also it makes suitable distinctions in its treatment of those in different economic situations. It necessarily raises questions of "similar economic circumstances", certainty in the tax laws is a fundamental principle in the establishment of ideal tax structure because predictability of tax consequences is an essential component of other basic tax principles. Finally, taxation has always been a mechanism for stabilisation and regulation of the economy. Recognising this fact, legislature has emphasised the economic effects of the principle of taxation, with a particular focus on encouraging economic growth. For the development of rational tax policy one should understand the nature of industry. Some of the peculiarities of Internet are"11. • It is a network of networks and it cannot be controlled or owned by one person. • This network of networks is capable of rapidly transmitting packets from one computer to another. • No human involvement is necessary to transmit data from one computer to another. • The Internet can re-route itself if one computer is connected to the net. Content wise the Internet is very rich. • The world-wide web environment provides a user friendly graphical interface. • A simple click is sufficient to obtain vast information anywhere in the World. • It encompasses all territorial and geographical limitations Keeping these unique qualities of the Internet in mind one should try to visualise the issues concerning the taxes on the net.
E-business for taxation is an intriguing concept. It crosses nine trillions12. In these circumstances, it seems an imperative for revenue authorities to examine the approach and policy towards taxation of e-commerce more comprehensively than they have to date. However, this examination should not be confined to the conventional topics like whether an emerchant has a permanent establishment, how income from one line transaction should be characterised and where consumption of goods and services delivered electronically takes place, etc. These topics should be considered in the context of broader study evaluating the total impact of e-transformation on business productivity, supply chain , economic cycles and sector differences. To put it in another way, revenue authorities should not simply focus upon taxation of e-commerce per se (such as B2C sale and purchase of goods by Amazon.com the downloading of Norton anti-virus program), where attention is typically focused upon the location and function of servers, characterisation of income and place of consumption. Instead, the analysis should extend more broadly to ensure a deeper understanding of the nature of ebusiness as it is today and as it will develop tomorrow. In this regard, it is tempting to argue that business function will simply and suddenly disappear into cyberspace and that virtual companies will be able to operate with little presence anywhere except a site hosted by an Internet service provider in a tax-free jurisdiction. Primarily, Internet activities are divided into two parts . One is "access service" and other is "content service13". In the former, access to the Internet will be provided to the individuals whereas, in latter, content consisting of information are delivered electronically. To distinguish further Internet service provider is one who provides the service of accessing Internet whereas, online service provider (OSP) is one who provides service through Internet. The service is rendered by them in return for the payment of subscription and usage fees. These are subjected to tax. The Internet as discussed earlier encompasses content/material service, traditional retail transaction to an electronic medium, electronic commerce involving digital products. This would eventually create so many intellectual property problems.
E-Commerce Taxation The well -planned tax system in India with the authority to levy taxes is divided between the Central and State Governments. • Central Government collects direct taxes like personal income tax, corporate tax • State Governments collect local and state sales tax. In India the tax policies should be carefully formulated based on a policy that is clear and transparent and is consistent with the international norm of characterisation of revenues. The Government should honour the principle of neutrality as laid down by the OECD in characterisation of income from e-commerce transactions. India has signed tax treaties with various countries. These are mainly based on OECD. These treaties are making it mandatory to reduce the loss of income due to double taxation and also to
give relief to Indian Assesses from double taxation. Taxation of e-commerce has become a major concern for international agencies and tax authorities worldwide. In Europe, North America and Australia and in many Asian countries substantial research has been conducted on the impact of e-commerce on taxation. Among the plethora of book reports, articles and papers produced on the topic, the work of OECD stands out as the most significant. The theme underlying throughout OECD work done till now is, that the Government has to successfully meet the challenges posed by e-commerce for taxation systems, and a global coordinated approach is required to tax a truly global phenomenon
EPSs enable a customer to pay for the goods and services online by using integrated hardware and software systems. The main objectives of EPS are to increase efficiency, improve security, and enhance customer convenience and ease of use. Although these systems are in their immaturity, some significant development has been made. There are several methods and tools that can be used to enable EPS implementation (Figure 4.2)
While customers pay for goods/services by cash, check, or credit cards in conventional businesses, online buyers may use one of the following EPSs to pay for products/services purchased online: • Electronic funds transfer (EFT): EFT involves electronic transfer of money by financial institutions. • Payment cards : They contain stored financial value that can be transferred from the customer's computer to the businessman's computer. • Credit cards : They are the most popular method used in EPSs and are used by charging against the customer credit. • Smart cards: They include stored financial value and other important personal and financial information used for online payments. • Electronic money (e-money/e-cash): This is standard money converted into an electronic format to pay for online purchases. • Online payment: This can be used for monthly payment for Internet, phone bills, etc. • Electronic wallets (e-wallets) : They are similar to smart cards as they include stored financial value for online payments. • Micro-payment systems : They are similar to e-wallets in that they include stored financial value for online payments; on the other hand, they are used for small payments, such as kurus in Turkey . • Electronic gifts : They are one way of sending electronic currency or gift certificates from one individual to another. The receiver can spend these gifts in their favorite online stores provided they accept this type of currency. Although these groups appear to be separate, there is some overlap among them. When the industry matures, this duplication in naming and function ought to be renamed. For example, ewallets can be classified as payment cards when they are used to store credit card information or as e-money when they store electronic currency. The standardization of payment mechanisms on the Internet is essential to the success of ecommerce. Businesses offering domestic and international services must have assurance that payment will be received, that it is secure and that it is valid. Addressing security issues is crucial to the acceptance of online payment standards: consumers and merchants must be able to trust that their information is kept intact and remains secure during transmission. SET and SSL are two standards that protect the integrity of online transactions. 4.2 ELECTRONĐC FUNDS TRANSFER (EFT) Electronic funds transfer is one of the oldest electronic payment systems. EFT is the groundwork of the cash-less and check-less culture where and paper bills, checks, envelopes, stamps are eliminated. EFT is used for transferring money from one bank account directly to another
without any paper money changing hands. The most popular application of EFT is that instead of getting a paycheck and putting it into a bank account, the money is deposited to an account electronically. EFT is considered to be a safe, reliable, and convenient way to conduct business. The advantages of EFT contain the following: • Simplified accounting • Improved efficiency • Reduced administrative costs • Improved security PAYMENT CARDS 4.3 PAYMENT CARDS Credit cards, debit cards, charge cards, smart cards are payment cards. They are the most popular tool for electronic payment transactions. Credit Cards There are two types of credit cards on the market today: • Credit cards issued by credit card companies (e.g., MasterCard, Visa) and major banks (e.g. Is Bankasi, Ziraat Bankasi, Yapi Kredi, etc.) Credit cards are issued based on the customer's income level, credit history, and total wealth. The customer uses these cards to buy goods and services or get cash from the participating financial institutions. The customer is supposed to pay his or her debts during the payment period; otherwise interest will accumulate. Two limitations of credit cards are their unsuitability for very small or very large payments. It is not cost-justified to use a credit card for small payments. Also, due to security issues, these cards have a limit and cannot be used for excessively large transactions. • Credit cards issued by department stores (e.g Boyner), oil companies (e.g. Shell) Businesses extremely benefit from these company cards and they are cheaper to operate. They are widely issued to and used by a broad range of customers. Businesses offer incentives to attract customers to open an account and get one of these cards. Debit Cards The difference between credit cards and debit cards is that in order to pay with a debit card you need to know your personal identification number (PIN) and need a hardware device that is able to read the information that is stored in the magnetic strip on the back [3]. Debit cards task similar to checks in that the charges will be taken from the customer's checking account. The benefit for the customer is the easiness of use and convenience. These cards also keep the customer under his or her budget because they do not allow the customer to go beyond his or her resources. The advantage to the merchant is the speed at which the merchant collects these charges. Charge Cards
Charge cards are similar to credit cards except they have no revolving credit line, so the balance must be paid off every month. Credit, debit, and charge card methods of payments have been successfully utilized in the pre-Internet period, and they are often used in the e-commerce world as well. Some of the reasons for their popularity in the e-commerce world are their availability (most customers own one of these cards), ease of use, and acceptance. To use these cards as an online payment system, a well-defined process is followed. A brief description follows. To accept payment cards payments, a merchant must have a merchant account with a bank. The buyer will be required to submit their credit-card number, expiration date and shipping and billing information when making a purchase online using a payment card. (Figure 4.3) A customer using his/her browser clicks on a product on the merchant's web site and adds it to an electronic shopping cart. The customer provides the shipping instructions and payment card information. This information is sent securely over the Internet to the merchant's commerce site (Step 1). The server software adds the merchant identification to the information transmitted. The merchant then submits this information to the acquiring bank with which the merchant holds an account (Step 2). The merchant bank transmits this information to the customer's bank for authorization. Then, the buyer's account information is verified. This involves the issuing bank from which the buyer obtained the credit card, and the credit-card association (Step 3). Verification is received by the acquiring bank (Step 4) and is passed on to the merchant (Step 5) who then ships the product (Step 6). Payment cannot be issued to the merchant until the product has been shipped. This entire process (not including shipment) takes approximately less than 30 seconds [2]!
Smart Cards A smart card is about the size of a credit card, made of a plastic with an embedded microprocessor chip that holds important financial and personal information. The microprocessor chip is loaded with the relevant information and periodically recharged. In addition to these pieces of information, systems have been developed to store cash onto the chip. The money on the card is saved in an encrypted form and is protected by a password to ensure the security of the smart card solution. In order to pay via smart card it is necessary to introduce the card into a hardware terminal. The device requires a special key from the issuing bank to start a money transfer in either direction. Smart cards can be disposable or rechargeable. A popular example of a disposable smart card is the one issued by telephone companies. After using the pre-specified amount, the card can be discarded. Smart cards have been extensively used in the telecommunications industry for years. Smart-card technology can be used to hold information on health care, transportation, identification, retail, loyalty programs and banking, to name a few. Smart cards enable information for different purposes to be stored in one location. The microprocessor chip can process different types of information, and therefore, various industries use them in different ways. Due to their multipurpose functions, their popularity in Turkey is also on the rise. Smart cards are broadly classified into two groups: Contact: This type of smart card must be inserted into a special card reader to be read and updated. A contact smart card contains a microprocessor chip that makes contact with electrical connectors to transfer the data. Contact-less: This type of smart card can be read from a short distance using radio frequency. A contact-less smart card also contains a microprocessor chip and an antenna that allows data to be transmitted to a special card reader without any physical contact. This type of smart card is useful for people who are moving in vehicles or on foot. They are used extensively in European countries for collecting payment for highway tolls, train fares, parking, bus fares, and admission fees to movies, theaters, plays, and so forth. Smart cards can accommodate a variety of applications that allow the customer to make purchases from a credit account, debit account, or stored value on the card. These cards can even have multiple applications operating at the same time. The customer, for example, could have a frequent flyer program working on the same card as the customer debit or credit account. This enables the customer to earn points in his or her favorite program. Several computer manufacturers (e.g. Compaq) are developing keyboards that include smart card slots that can be read like bank credit cards. A smart card can be programmed for different applications. Some cards contain programming and data to support multiple applications, and some can be updated with new applications after they are issued. IBM, Microsoft, Schlumberger, and Bull are among the major players in smart card development and utilization [1]. Some of the advantages of smart cards include the following: • Stored many types of information • Not easily duplicated • Not occupy much space
• Portable • Low cost to issuers and users • Included high security The disadvantages of smart cards are the lack of universal standards for their design and utilization. On the other hand, smart card applications are expected to increase as a result of the resolution of these disadvantages in the near future. 4.4 ELECTRONĐC CASH (E-CASH) Similar to regular cash, e-cash enables transactions between customers without the need for banks or other third parties. When used, e-cash is transferred directly and immediately to the participating merchants and vending machines. Electronic cash is a secure and convenient alternative to bills and coins. This payment system complements credit, debit, and charge cards and adds additional convenience and control to everyday customer cash transactions. E-cash usually operates on a smart card, which includes an embedded microprocessor chip. The microprocessor chip stores cash value and the security features that make electronic transactions secure. Mondex, a subsidiary of MasterCard (Mondex Canada Association) is a good example of e-cash. E-cash is transferred directly from the customer's desktop to the merchant's site.Therefore, e-cash transactions usually require no remote authorization or personal identification number (PIN) codes at the point of sale. E-cash can be transferred over a telephone line or over the Web. The microprocessor chip embedded onto the card keeps track of the e-cash transactions. Using e-cash the customer has two options: a stand-alone card containing e-cash or a combination card that incorporates both e-cash and debit . How a typical e-cash system works: A customer or merchant signs up with one of the participating banks or financial institutions. The customer receives specific software to install on his or her computer. The software allows the customer to download “electronic coins” to his or her desktop. The software manages the electronic coins. The initial purchase of coins is charged against the customer's bank account or against a credit card. When buying goods or services from a web site that accepts e-cash, the customer simply clicks the “Pay with e-cash” button. The merchant's software generates a payment request, describing the item(s) purchased, price, and the time and date. The customer can then accept or reject this request. When the customer accepts the payment request, the software residing on the customer's desktop subtracts the payment amount from the balance and creates a payment that is sent to the bank or the financial institution of the merchant, and then is deposited to the merchant's account. The attractive feature of the entire process is its turnaround time which is a few seconds. The merchant is notified and in turn ships the goods. 4.5 ELECTRONĐC CHECKS (E-CHECK) E-check is the result of cooperation among several banks, government entities, technology companies, and e-commerce organizations. An e-check uses the same legal and business protocols associated with traditional paper checks. It is a new payment instrument that combines high-security, speed, convenience, and processing efficiencies for online transactions. It shares the speed and processing efficiencies of all-electronic payments. An e-check can be used by
large and small organizations, even where other electronic payment solutions are too risky or not appropriate. The key advantages of e-checks are as follows: • Secure and quick settlement of financial obligations • Fast check processing • Very low transaction cost E-check is being considered for many online transactions. E-WALLETSLECTRONĐC WALLETS (E-WALLETS) Electronic wallets being very useful for frequent online shoppers are commercially available for pocket, palm-sized, handheld, and desktop PCs. They offer a secure, convenient, and portable tool for online shopping. They store personal and financial information such as credit cards, passwords, PINs, and much more. To facilitate the credit-card order process, many companies are introducing electronic wallet services. E-wallets allow you to keep track of your billing and shipping information so that it can be entered with one click at participating merchants' sites. E-wallets can also store echecks, ecash and your credit-card information for multiple cards. A popular example of an e-wallet on the market is Microsoft Wallet . To obtain Microsoft Wallet, one needs to set up a Microsoft Passport. After establishing a Passport, a Microsoft ewallet can be established. Then, e-wallets can be used for micro-payments. They also eliminate reentering personal information on the forms, resulting in higher speed and efficiency for online shoppers. Microsoft Passport consists of several services including the following [5]: A single sign-in, wallet and kids passport services. A single sign-in service allows the customer to use a single name and password at a growing number of participating e-commerce sites. The shopper can use to make fast online purchases with a wallet service. Kids' passport service helps to protect and control children's online privacy. 4.7 MĐCRO-PAYMENT Merchants must pay a fee for each credit-card transaction that they process; this can become costly when customers purchase inexpensive items. The cost of some items could actually be lower than the standard transaction fees, causing merchants to incur losses. Micro-payments are used for small payments on the Web. The process is similar to e-wallet technology where the customer transfers some money into the wallet on his or her desktop and then pays for digital products by using this wallet. Using micro-payment one will be able to pay for one article from a professional journal, a chapter from a scientific book, or one song from a CD on the Web. There are many vendors involved in micro-payment systems. IBM offers micropayment wallets and servers. IBM micro-payment systems allow vendors and merchants to sell content, information, and services over the Web. It provides universal acceptance and offers comprehensive security. This micro-payment system can be used for billing by banks and financial institutions, Internet service providers (ISPs), content providers (offering games, entertainment, archives, etc.), telecommunications, service providers (offering fax, e-mail, or phone services over the Web), and by premium search engines and specialized databases.
A number of companies will allow for outsourcing the payment-management systems. Many of these systems can handle multiple payment methods including micro-payments. Qpass is an example of a company that can manage micro-payments for payper-download, subscriptionbased and pay-per-click systems. Qpass enables periodicals such as The New York Times and The Wall Street Journal to offer subscriptions over the Web. Customers who buy products and services through a Qpass-enabled company receive monthly bills that include descriptions of all purchases made during that month. Additional services offered by Qpass include the Qpass Power Wallet, which registers passwords, credit-card information and other preferences necessary to make online transactions more efficient customer service marketing and sales assistance (Figure 4.4).
The legal environment of electronic commerce Introduction The global spread of Internet creates favourable conditions for the growth of electronic commerce. At the same time, this is a challenge to the legal framework of many countries because the legal framework is insufficiently flexible or insufficiently specific in regulating the new relations between business entities. The Internet commerce presents the following problems to the legal framework of states: Distance transactions. More often than ever before the buyer-seller relations are losing direct contact. On the Internet it may happen that neither party to the transaction knows about the transaction until it is due to be performed, let alone have the written form of the transaction. New conditions and forms for the validity of transactions are necessary. It is also imperative to have means how to define the liability of the parties. Payments. New payment methods and means have emerged in the public environment of the wide world web. Almost every transaction of this kind involves, in addition to the buyer or
seller, their banks and the operators of the payment systems, if any. Since the number of frauds through the use of electronic payment means is quite considerable these days, the liability of each party must be unambiguously defined. International aspects. Although electronic commerce does not recognise national borders, they are still recognised by commercial law. The existing specific legal acts, taxation rules and restrictions on imports and exports still remain an important, slow moving issue to lawyers Consumer protection. The population requires guarantees that the presentation of goods and services on the Internet should conform to their qualities, that the buyer should be entitled to return the acquired defective product, that the consumer should be protected against undesired advertising or against the improper use of his/her personal data. Protection of trade marks, Internet and intellectual property. The territory-bound character of law related to these forms of property runs counter to the realities of the cross-border nature of the Internet, while the digital form of many products distributed in the cyberspace is especially vulnerable to illegal copying. Law of the European Union The directives of the European Parliament and the Council are not directly applicable in the jurisdiction of the member states, but their national laws should be harmonised with the directives. Although the EU legal acts related to electronic commerce are determined by the member states, the most important provisions of commercial law are laid down in the directives of the European Parliament and the Council (which may be ratified by the Parliaments of the member states) in order to simplify the movement of money and goods in the internal market. In the attempt to improve its legal acts, including the acts on electronic commerce, Lithuania is using EU commercial law as a model. Reference to the most important documents and their main provisions the reader will find in the following pages. Directive on distance transactions The Directive on Distance Transactions, adopted in 1997, regulates the principles of consumer protection in respect of transactions made without a physical contact of the parties: by telephone, post, electronic means. The main provisions of the Directive are the following: Confirmation of the transaction. After the conclusion of the transaction, the consumer should receive a confirmation in the medium acceptable to both parties (e. g. by e-mail or on paper). Right of revocation. The consumer is entitled to withdraw from the transaction within 7 business days without any penalty or requirement to produce reasons.
Full information. The seller must inform the buyer beforehand of the exact prices for the goods and services offered (as well as any other charges), their validity date, delivery costs and their precise qualities. Prohibition on inert transactions. Transactions which are not sanctioned by the consumer are prohibited even if the consumer has been informed of the ways how he may withdraw from the transaction. Directive on electronic commerce This latest legal act specially designed for digital business lays down, among other things, the requirements for the provider of information society services (ISS) and the regulatory principles of his business: Identification. The parties must ensure that information on the ISS provider’s, established on their territory, name, postal and e-mail addresses, registration and VAT code should be easily accessible to consumers and competent institutions. Commercial correspondence. If the IVP consists, in part or in whole, of material of advertising nature, the service provider must identify it explicitly as such and indicate the natural person or legal entity represented by it. The same is applicable to rebates, games, special offers, gifts, etc. The Directive requires that member states should control the unapproved sources of commercial correspondence distributed via e-mail within their legal framework. Electronic transactions. Member States must ensure that their laws should provide for the validity of electronic commercial transactions. The service provider must inform, clearly and unambiguously, the service recipient of all the technical steps necessary to make the transaction. After the conclusion of the transaction the service provider must issue the confirmation/receipt of the transaction. Throughout this process, up to the last stage, the recipient of the service must have the possibility of withdrawing from the transaction or correct any mistakes. The responsibility of the communications intermediary. Electronic communications intermediaries, i. e. the providers of services of Internet communications and telecommunications operators, are not responsible for the content transmitted or placed by using their services or for the transactions made. The electronic communications intermediaries are not obliged to monitor the transmitted or saved information for possible illegal activities. Directive on the harmonisation of copyright and related rights in the information society (draft) So far, the vast possibilities for the distribution of music and video works on the Internet have been hampered by the equally vast digital pirating wave. This document, which is under deliberation in the European Parliament, meets the requirement of the amusement industry to
guarantee copyright and the protection of technologies used to assure the copyright. However, the directive still permits to make copies exclusively for personal use, but only by analogue technology (i. e. copying from a CD to MP3 would be illegal). In addition, illegal are programmes and means designed to "break" the anti-pirate protection. Other acts In addition to the documents mentioned above, there are several other EU legal acts which affect the environment of the Internet business. •
Directive on electronic monetary institutions, draft
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Recommendation on electronic payment instruments
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Directive on electronic signatures Situation in Lithuania
With a view to codifying the legal environment of electronic commerce in Lithuania, the Government has taken measures to draft a package of legal acts to encourage retail and businessto-business electronic commerce. This package is drafted according to the respective EU norms. However, considering the general character of EU directives, the legislation is drafted so as to include more specifically defined requirements, liabilities and responsibilities. The Law on Electronic Signature The only effective legal document specifically designed for electronic data communications is the Law on Electronic Signature, adopted in 2000. Its text is very similar to the EU Directive on electronic signatures, however, it also includes some new provisions. The electronic signature is a special supplement, formed by a cryptographic algorithm, to a digital document. It is inseparable from the content of the document and the electronic certificate of its author. The purpose of the electronic signature, just as that of a conventional signature, is to ensure the authenticity of the document’s author and contents. The recipient of the document uses another algorithm which compares the digital signature to the document and its author’s public certificate. This algorithm recognises if the text of the document has been modified without using the original certificate. The Law regulates the procedure for the formation of the electronic signature, equipment and the activities of institutions responsible for the issuance of electronic certificates. For example, any natural person or legal entity may issue electronic certificates for its own needs or the needs of its clients, but only the qualified certificates have the legal validity of a written signature. "A secure electronic signature, created by a secure equipment used for the formation of the signature, and certified by a valid qualified certificate, shall have the same legal validity as a signature on written documents, and shall be admissible as a evidence before court" (8.1.a
Article). However, subparagraph 2 of the same Article says that the instruments and procedure for the formation of an electronic signature as such may not be pleaded as grounds for doubting the power of proof – other objective criteria must be submitted to the court. The State Electronic Signature Supervisory Authority is responsible, among other things, for the accreditation of the service providers and the determination of the main procedural and technical requirements for qualified certificates. The Law does not regulate the rules as to when the electronic form of the documents is admissible or for what purposes. This is left for the regulation by further statutory and regulatory acts, but we can predict that the provisions of this Law will be important for the realisation of EDI and business-to-business electronic commerce, i. e. for the area where the documents signed electronically may be used. Protection of intellectual property The Republic of Lithuania has acceded to the Berne Convention on the protection of literary and artistic works (the Paris version) and the Madrid international agreement relating to trade and service marks (the Nice version). The existing Law on the Legal Protection of Software and Databases is sufficiently well adapted for the protection of the design of Internet homepages and software from illegal copying. The protection of all other forms of intellectual property is guaranteed by the Civil Code of the Republic of Lithuania. Documents under development or deliberation Amendments to the Civil Code provisions related to contract law. Articles 41-45 of the existing Civil Code of the Republic of Lithuania defines the written and oral forms of contracts between persons. In the electronic market this choice is limited, therefore the new draft of paragraph 2 Article 1.73 of the First Book of the Civil Code 1.says that "Document in written form shall be equated to a document signed by the party and transmitted by telegraph, fax or other instant communication means provided that the protection of the text is ensured and it is possible to identify the signature." The formulation of this provision provides a basis for the application of the provisions of the Law on Electronic Signature in respect of civil transactions. The Law on Electronic commerce. A draft of this law is being developed by the Department of Information and Informatics of the Ministry of Public Administration Reforms and Local Authorities on the basis of the EU directive on electronic commerce and the UNCITRAL model law. The Law, when adopted, will define the legal validity and scope of application of any electronic transaction; it will also determine common requirements for commerce on the Internet. Legislation problems
In order to adapt the Lithuanian legal framework to the needs of the Internet business, it is necessary to establish what kind of legal acts are missing and which existing legal acts contradict the fundamental principles of electronic commerce. Here are some of the most important issues. Liability of the parties to the electronic settlement. Electronic payments date back much earlier than electronic commerce. They have their roots in banking technologies and the EDI systems of the ‘80s. Since then, the relations between the parties of the settlement have been regulated by direct agreements or bilateral agreements between a company and the network operator (e. g. S.W.I.F.T.). Such legal environment is still satisfactory to many EDI parties. There is no infrastructure for direct electronic payments in Lithuania, except for banks, public institutions and financial service companies. However, there are two new factors which require a better definition of the norms applicable to electronic settlements. First, electronic settlements have become a consumption commodity therefore it requires an appropriate programme for consumer protection. Second, settlements have moved to the Internet where there is no single operator or mandatory rules. In the rectangle "Purchaser – the purchaser’s bank – the seller’s bank – the seller" liabilities of each party must be defined in respect to possible damages through its own or a third party’s fault. If the national legal acts do not provide for such liabilities, it is quite likely that mass consumers will become the most vulnerable link in these multilateral relations. The EU recommendation on electronic payment instruments is a model for the state to follow in attempts to ensure the protection of the consumer from unrestrained civil sanctions. Internet domain names A lot of experts agree that the names of Internet domains are a form of property similar to a trade mark. Therefore, this fact should not be neglected in trade mark law. On the other hand, the territory-related and specificity principles of trade mark law contradict the procedure of the formation and use of domain names. So, strictly speaking, a domain name as such may not get the same protection as is applied to trade marks. Ownership disputes over domain names and attempts at selling prestigious domain names have become a reality in Lithuania. So far, the status of a domain name as property and its legal protection has not been regulated, while domain names are often provided by organisations whose activities are not regulated by any legal act, except for the internal rules of the register. Accounting documents Subject to the EU directives, the receipt/confirmation of a transaction is an essential instrument of electronic commerce. However, taking into consideration the peculiarities of the Internet, the
Directive on Distance Transactions permits any "reliable" form of the receipt, i. e. it can be presented by e-mail, on a diskette or on paper. Article 9 of the Law on the Fundamentals of Financial Accounting of the Republic of Lithuania provides for a strictly defined form of confirmation. It is emphasised that "companies shall support their business transactions, except for telecommunications services for mass consumption, with accounting documents." However, "transactions, including the telecommunications services delivered for mass consumption, which, under the procedures established by the Government of the Republic of Lithuania, are not required to use special accounting documents, shall be supported by documents drawn up in the model or free form. The Government has established a procedure for the exemption of certain sales groups from special accounting documents, but the list of such groups does not include electronic sellers. At present, businessmen engaged in electronic commerce deliver the invoice to the buyer together with the purchased product, while for ISS providers and users, who do not communicate in any other way except electronic communication (e. g. paid information services on the Internet), this method is too complicated. A proposal has been submitted to the Government to define the same accounting rules for ISS providers which are applicable to the providers to telecommunications services. THE ENVIRONMENT OF ELECTRONIC COMMERCE: LEGAL, ETHICAL, AND TAX ISSUES The Legal Environment of Electronic Commerce Š Online businesses „ Must comply with the same laws and regulations that govern the operations of all businesses „ Face complicating factors Web extends a company’s reach beyond traditional boundaries z Web increases speed and efficiency of business communications Web creates a network of customers
Borders and Jurisdiction Š Territorial borders in the physical world mark the range of culture and reach of applicable laws very clearly Š European Union (EU) „ Allows free movement within the EU for citizens of member countries „ Adopted a common currency
E-commerce occurs in various forms and between various entities in the market. One among the question faced by nations is how to tax it. As the internet crosses the boundaries the main challenges are how the basic requirements of physical presence can and substantial nexus criteria
of taxation can be met. The article tries to analyze the key issues in the area of e-commerce taxation. Article alarms the nation that if it is left untaxed it will give rise to a parallel economy. Every industry contributes to the nations economic growth. The communications industry has become very significant and is promising to grow enormously in the near future. Unlike other communication media, Internet is facilitating access to knowledge bank, in competitive market and rendering services of world class standard. E-commerce offers a new way of conducting, managing and executing business transactions using modern information technology. It has redesigned the traditional mode of business. As a whole, it is a business practice that involves use of computers, computer systems or computer networks1. E-commerce occurs in various forms and between various entities in the market . The question is how to tax it. As the Internet has crossed borders (sovereignty) how can the requirements of physical presence and substantial nexus criteria of taxation be met.Due to the uniqueness of ecommerce, taxation faces a number of problems. This articles tries to find out the key issues in the area of e-commerce taxation and tries to analyse the existing regime with regard to the e commerce taxation. It is also alarmed that if this is left untaxed , it will give rise to a parallel economy. Definition of E-commerce According to Greenstein and Ferman3 "electronic commerce (e-commerce) is defined as the use of electronic transmission medium ( telecommunication) to engage in the exchange, including buying and selling of products and services requiring transportation either physically or digitally from location to location." E-commerce is any transaction completed over a computer-mediated network that involves the transfer of ownership or rights to use goods or services. According to European Commission4, ecommerce encompasses more than the purchase of goods online. It includes a disparate set of loosely defined behaviours such as shopping, browsing in Internet for goods and defined behaviours, gathering information about items to purchase and completing the transaction like any other sustained business activity. It also means conducting consumer satisfaction surveys, capturing information about consumers and maintaining consumer databases for marketing promotion and other related activities. The first phase of e-commerce threw up a new business nomenclature using various combination of business and consumers5. It has its own advantages and disadvantages6 as in traditional business methods. Thus, e-commerce has necessarily changed the world economy in a dynamic and interactive pattern. Taxation for Internet Transaction The Internet has changed many of the fundamental and long standing concepts of direct and indirect taxation. Governments all over the World are grappling with the various issues of taxation raised by e-commerce. This is because of lack of comprehensive understanding of: • The communication technologies
• The complex nature of business offered through Internet business, etc. • The modus operandi of Internet business, etc. has made the operation of tax legislations more difficult. The Information Technology Act, 2000, which is the first legislation to deal with e-commerce is quite silent about tax system. Substantial amount of state revenue which is generated through direct and indirect taxes is lost when Internet transaction remain untaxed7. A way is to be found to tackle this relevant problem. Basic Principles of Taxation Several basic principles form the foundation of taxation policy in any country. The most important of these principles are efficiency, equality, certainty and positive economic effect8. If the tax system disregards these principles it is fatally defective. The efficiency principle encompasses notions of both fiscal and economic efficiency. An economically efficient tax system should be neutral and not influence one's economic behaviour simply because of the manner in which the tax is levied. An ideal tax system is also equitable in its application. Not only does it treat taxpayers in similar economic circumstances9similarly but also it makes suitable distinctions in its treatment of those in different economic situations. It necessarily raises questions of "similar economic circumstances", certainty in the tax laws is a fundamental principle in the establishment of ideal tax structure because predictability of tax consequences is an essential component of other basic tax principles. Finally, taxation has always been a mechanism for stabilisation and regulation of the economy. Recognising this fact, legislature has emphasised the economic effects of the principle of taxation, with a particular focus on encouraging economic growth. For the development of rational tax policy one should understand the nature of industry. Some of the peculiarities of Internet are"11. • It is a network of networks and it cannot be controlled or owned by one person. • This network of networks is capable of rapidly transmitting packets from one computer to another. • No human involvement is necessary to transmit data from one computer to another. • The Internet can re-route itself if one computer is connected to the net. Content wise the Internet is very rich. • The world-wide web environment provides a user friendly graphical interface. • A simple click is sufficient to obtain vast information anywhere in the World. • It encompasses all territorial and geographical limitations Keeping these unique qualities of the Internet in mind one should try to visualise the issues concerning the taxes on the net.
E-business for taxation is an intriguing concept. It crosses nine trillions12. In these circumstances, it seems an imperative for revenue authorities to examine the approach and policy towards taxation of e-commerce more comprehensively than they have to date. However, this examination should not be confined to the conventional topics like whether an emerchant has a permanent establishment, how income from one line transaction should be characterised and where consumption of goods and services delivered electronically takes place, etc. These topics should be considered in the context of broader study evaluating the total impact of e-transformation on business productivity, supply chain , economic cycles and sector differences. To put it in another way, revenue authorities should not simply focus upon taxation of e-commerce per se (such as B2C sale and purchase of goods by Amazon.com the downloading of Norton anti-virus program), where attention is typically focused upon the location and function of servers, characterisation of income and place of consumption. Instead, the analysis should extend more broadly to ensure a deeper understanding of the nature of ebusiness as it is today and as it will develop tomorrow. In this regard, it is tempting to argue that business function will simply and suddenly disappear into cyberspace and that virtual companies will be able to operate with little presence anywhere except a site hosted by an Internet service provider in a tax-free jurisdiction. Primarily, Internet activities are divided into two parts . One is "access service" and other is "content service13". In the former, access to the Internet will be provided to the individuals whereas, in latter, content consisting of information are delivered electronically. To distinguish further Internet service provider is one who provides the service of accessing Internet whereas, online service provider (OSP) is one who provides service through Internet. The service is rendered by them in return for the payment of subscription and usage fees. These are subjected to tax. The Internet as discussed earlier encompasses content/material service, traditional retail transaction to an electronic medium, electronic commerce involving digital products. This would eventually create so many intellectual property problems.
E-Commerce Taxation The well -planned tax system in India with the authority to levy taxes is divided between the Central and State Governments. • Central Government collects direct taxes like personal income tax, corporate tax • State Governments collect local and state sales tax. In India the tax policies should be carefully formulated based on a policy that is clear and transparent and is consistent with the international norm of characterisation of revenues. The Government should honour the principle of neutrality as laid down by the OECD in characterisation of income from e-commerce transactions. India has signed tax treaties with various countries. These are mainly based on OECD. These treaties are making it mandatory to reduce the loss of income due to double taxation and also to
give relief to Indian Assesses from double taxation. Taxation of e-commerce has become a major concern for international agencies and tax authorities worldwide. In Europe, North America and Australia and in many Asian countries substantial research has been conducted on the impact of e-commerce on taxation. Among the plethora of book reports, articles and papers produced on the topic, the work of OECD stands out as the most significant. The theme underlying throughout OECD work done till now is, that the Government has to successfully meet the challenges posed by e-commerce for taxation systems, and a global coordinated approach is required to tax a truly global phenomenon
