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
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:
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
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
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
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