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E-commerce

by Rohit Ramnawaz

E-commerce may be defined as the conduct of commercial activities through electronic devices with the result that the transaction occurs in a quicker and more cost effective way (at least in theory!). E-commerce has the key characteristic of bringing customers closer to suppliers by allowing both to communicate directly and finalise a commercial transaction, without the need for intermediaries (retailers, salesmen etc.), through a communication system or network, primarily the internet. E-business is a broader but less commonly used term which encompasses e-commerce.

E-commerce is generally split in two principal categories: business to business commerce and business to customer commerce. But there are other smaller facets of e-commerce that have developed thereafter. Whilst the process is virtually similar, businesses use mainly leased dedicated lines whilst the end customer uses his traditional telephone line for connection. E-commerce is not an entirely new phenomenon in the sense that major companies have been exchanging commercial data through networks for a long time. This is what is termed as business to business (B2B) e-commerce. The convenience of exchanging/accessing data and conducting business transactions at reduced costs through networks led businesses to start promoting their products to end customers (business to customer or B2C). It must be noted that e-commerce relates to the conduct of commerce with regard to both tangible (e.g. cars, clothes, artworks etc.) and intangible products (computer software, music, electronic books etc.).

In addition to B2B and B2C e-commerce, recent developments enable customer to customer (C2C) and
customer to business (C2B) e-commerce to be carried out although both are not really significant in terms of volume. C2C e-commerce enables customers to sell directly to other customers (e.g. an individual wants to sell a painting and calls for bids) whilst C2B e-commerce enables customers to bid for certain products which are "time-bound" i.e. where sales cannot be deferred for a later date (e.g. hotel rooms, airline tickets). For example, where a hotel room is vacant at a given date or period, the hotel manager may accept an offer from a client who wishes to pay less than the normal rate. Here the customer makes the bid and the hotel manager is left with the option to accept or reject the offer and he may accept the offer if he knows he might not be able to let the room for that day or period. Similarly a scheduled air flight with lots of empty seats may accept offers from customers to travel at reduced rates.

To better appreciate the advantages of e-commerce, one should first consider the aspects (and related costs and inconvenience) of a traditional commercial activity (e.g. sales of goods) including the distribution chain required to send those goods to various retailers around the country, costs of stock and reorder costs to replenish the stocks whenever necessary as and when sales occur. The final price charged to the customer will therefore need to take into account, besides the direct costs of the good, the following factors: distribution costs, holding costs of stock, supplier's margin, retailer's margin and warehousing costs (at supplier's and retailer's end). With regards to the customer, he will need to walk or drive to his usual shop (and sometimes will also visit other shops to see if he can get a better bargain elsewhere) to purchase the desired goods despite possible time constraints.

E-commerce effectively addresses and eliminates some of the issues mentioned above. Arguably, the most important feature of e-commerce is that the customer can place his order by sitting at his desk or at home. By using the appropriate connection devices (basically computers), he can 'visit' several suppliers, obtain product specifications/quotations, compare and order from home. Delivery of the goods is effected through courier companies with which the supplier would have made special arrangements. Price reduction is another significant benefit of e-commerce because so many of the costs indicated above can be eliminated.

E-commerce enables trade to be carried out cross-border even though the customer may not necessarily be realising it. E-commerce indeed constitutes a very wide choice for the procurement of goods and services from practically any part of the world. For example, a Mauritian citizen may enter a site linked to a server in France which is owned by a UK company and order goods which will be delivered to him from the Netherlands. E-commerce therefore requires not only low cost and very efficient communication facilities but also very efficient distribution channels to ensure delivery of the products to the customer in time and at low costs.

E-commerce, however, also has certain drawbacks for the end customer. In many cases, the product specification, though not necessarily misleading, offers a 'better than real' picture of the product. If the customer receives the good and is not satisfied, he may encounter lots of problems in returning the good to claim his refund, especially as that payment may have already been made through his credit/debit card.

The basic conditions for successful e-commerce
E-commerce has witnessed phenomenal growth in the last decade and revenues from e-commerce activities worldwide in 2000 have been estimated at more than £1bn. The growth in e-commerce has certainly seen many governments, businesses and service providers caught unaware and unprepared.

The critical conditions that lead to successful conduct of e-commerce may be summarised as follows:

Infrastructure
As mentioned above e-commerce is conducted through electronic devices and helps bring the customer closer to his supplier. The customer must therefore have the appropriate equipment at his end. But he should also be able to link his equipment to that of the supplier and, to this end, there should therefore be adequate high-quality telecommunication facilities and technology available at reasonable costs. The customers and suppliers can communicate efficiently and be brought only as close as the infrastructure and technology may allow. The main reason that has so far prevented the expansion of e-commerce in many countries is high telecommunication costs. In addition, telecommunication facilities in different parts of the world need to be connected and there should therefore be certain operating rules to which telecommunications service providers must adhere so as to enable operations to be carried out successfully. High bandwidth telecommunication facilities must be set up to satisfy both current and increasingly growing requirements for reliable and fast communication/data transmission channels. The other key element for e-commerce to be carried out successfully is the implementation of a secure payment/settlement system.

Regulation
The already significant and ever increasing volume of transactions carried out through e-commerce require the need for legislation and well-established and universally accepted rules that would regulate the suppliers and adequately protect the customer. Since e-commerce is carried out without the two parties ever seeing each other in most cases, it is very important to create the right framework for both the consumer and the supplier to carry out a transaction in confidence.

The customer needs to be confident enough that his order will be processed without any modification and that all personal data concerning himself is not used for unauthorised purposes. The product should not be different from the one he has ordered, the delivery period should be reasonable and the customer must be fully aware of all related costs at the time of ordering and must not end up with unexpected costs that increase the final price paid by him.

The supplier, for his part, must ideally be able to 'confirm' the genuineness of the order and must be confident that he is going to get paid at the end of the process.

It is possible nowadays, to implement secure ordering/payment systems by having recourse to digital signatures which are unique to the parties involved and hence serve to confirm the authenticity and accuracy of the data transmitted.

Practical issues that arise

Convincing the customer
Despite all the expansion in e-commerce, business to business e-commerce remains the most significant. Business to customer e-commerce is not developing as fast as expected and many 'dot.com' companies have been facing difficult times. This may be due to social reasons (many people enjoy the day out shopping) or unreasonable connection costs or because, unlike businesses, not many customers in the world have access to the equipment needed for e-commerce. The latter factor is even more noticeable in underdeveloped and developing countries. And even where these factors are not real constraints, the customer very often remains sceptical about e-commerce because he cannot trust the system. One major factor is that the customer cannot bring himself to provide his credit card details over the internet, especially when so many cases of fraud are reported.

Residency, taxation
E-commerce, by its very aspect, is borderless or 'transnational' and therefore gives or may give rise to differing interpretations by countries as to the right of taxation. The European Union, the OECD, various regional groups and individual countries are trying to devise ways for effective taxation of e-commerce without obstructing the development of e-commerce. In theory, taxation could occur at the following points:

  • a consumption tax at the place where the product is consumed;
  • a profits tax on the trading entity;
  • a tax on the product at the point of sale.

To better understand the issue, we will consider our above example of a Mauritian citizen entering a site linked to a server in France which is owned by a UK company and ordering goods which will be delivered to him from the Netherlands.

  • Consumption tax
    This is the tax that is usually applicable on goods imported in Mauritius. It is easy to enforce in the case of tangible goods since the tax would be levied at the point of entry into Mauritius but there is a real problem when it comes to imposing such taxes on intangible goods, for example, if software had been downloaded by a Mauritian citizen through the internet. There would be no practical means for the Mauritian authorities to impose any such tax.
  • Profits tax
    The question is that, the server being based in France, should France have the rights to tax the profits from the trade? Or since the site is owned by a UK company, should the UK have the right to tax the profits from the trade?
    The general consensus with regard to taxation is that a country may have the right to tax a business if that business has a Permanent Establishment in that country. A permanent Establishment generally means a fixed place of business through which the business of the enterprise is wholly or partly carried on.
    In this case the server is 'permanently' based in France under arrangements with a French Internet Service Provider. The critical issue therefore, is whether this constitutes a Permanent Establishment in France, hence giving France the right to tax the profits of the trade? It would appear that there is a general consensus amongst most countries that the website does not in itself give rise to a Permanent Establishment.
  • Tax at point of sale
    Here we have to consider the impact of taxes like Value Added Tax. Since the product is delivered from the Netherlands, should the Dutch government impose VAT on the product? Bearing in mind that not all countries have taxes similar to VAT, would the VAT element not make the price more uncompetitive vis-a-vis prices of similar products originating from ‘non-VAT’ countries.
    It can be noted that taxation of e-commerce activities gives rise to complex situations to which there is as yet no outright internationally accepted sets of rules. The OECD and the European Union are trying to devise acceptable rules for taxation of e-commerce whilst at the same time ensuring the rules do not effectively act as a deterrent for the conduct of e-commerce.

Fight against criminal activities
Since most activities are carried out without physical interface between the parties involved, e-commerce constitutes an enormous challenge for law enforcement agencies. E-commerce can potentially be used for various illegal activities such as money laundering, illegal casino and gambling operations, and the sales of products without copyright (e.g. music or software). Several law enforcement agencies, especially those in the developed countries, are actively cooperating to combat what is widely termed as cybercrime.

Settlement of disputes
Since electronic commerce knows no border, it implies that disputes may be more complex to settle than in traditional cases of trade. Many consumers do not know much about the identity and credibility/creditworthiness of the supplier. They may (and often do) end up with goods and services that do not fully conform to their expectations. For example, the quality and cut of products such as clothes can only be verified when the customer actually sees and feels the clothes when these are delivered to him, not through the rosy description on a website. By the time they receive the products they have ordered, payment in favour of the supplier may have already been processed and it therefore complicates matters to return the products and claim a refund, especially if the supplier is in 'cyberspace'. The supplier is definitely in a dominant position because not many consumers will want to go through lengthy, uncertain and costly procedures to claim a refund from a supplier he does not know much about and who is physically remote from him even where a clear right of redress may exist.

Conclusion
Given the growing importance of e-commerce, governments are trying to cooperate amongst themselves to come up with rules that would protect customers. But it must be said that it is a phenomenal task to try to find easy settlement mechanisms between differing legal systems and there is lots of work to be done before an internationally accepted set of rules is developed.

The only certain thing is that there is no going back, e-commerce is already a global phenomenon and is here to stay and will definitely influence our shopping habits, albeit more gradually than expected especially in the underdeveloped countries.

Rohit Ramnawaz is employed in the offshore sector in Mauritius