Spare the ISPs

A fund-short government's Finance Minister Yashwant Sinha, it seems, is in a taxing mood. In the run up to the 28 February Union Budget, the media is full of speculative proposals about various new tax proposals. One that has caught some attention is a reported move to bring the Internet services under the 5 percent service charge net. There is also a proposal to levy a tax of all e-commerce transactions.

These two proposals have several demerits. Internet is the phenomenon of the mid-1990s. India lost a lot of opportunities by artificially restricting the growth of this sector through government run monopoly organizations. Of course, the mistake was corrected when the Vajpayee government removed the restrictions to allow the entry of private Internet Service Providers (ISPs). The transformation of the Internet access sector has been dramatic. Over 300 ISPs have been licensed since September 1998, and nearly 75 of them are in the business.

The government had in fact given a 5-year tax holiday by recognizing ISPs as infrastructure providers. A token one rupee was charged as license fee. All these concessions and incentives were given to spread the use of the Internet. These reasons still remain valid. In fact, the full potential of the Net has yet to be realized. The Net provides an ideal media for communities-both business and social--in far flung corners of the country to be in tune with the fast globalizing world, be it for information, communication or tapping economic opportunities. The government should not provide a hiccup with a service tax on this sector.

There is another strong reason against slapping a service tax on the ISP sector. A majority of the Internet users today access the Net through their telephone lines. The telephone usage has increased a lot in the Net-era. The telecom component of Net access is more than the usage charges. And telecom services are already under the service tax net. Increasing Net usage is anyway increasing the telecom service charge revenues. The new proposal will end up a double taxation measure on yet another numerically small community, and defeat the objective of widening the tax base.

Similarly, e-commerce is also at a nascent stage of development in the country. Industry estimates the e-com transactions at Rs 2,300 crore. There will be a lot of technical problems in arriving at the quantum of e-com transactions as many of the players have both the physical and electronic transaction modes. It is early to tax such transaction. No country in the modern world has attempted this so far. The government should give breathing space for the ISPs and eCom companies for some more years and widen the tax net when they reach a sufficiently large size. Even the industry would not mind much then.