Electronic Commerce ("e-commerce") has been defined by the Organisation for Economic Cooperation and Development ("OECD") to be ‘commercial transactions, involving both organisations and individuals, that are based upon the processing and transmission of digitized data, including text, sound and visual images and that are carried out over open networks (like the Internet) or closed networks (like AOL or Minitel) that have a gateway onto an open network’. These include electronically marketed products from business-to-consumer, which are ‘intangibles such as travel and ticketing services, software, entertainment, banking, insurance and brokerage services, information services, legal services, real estate services, and increasingly health care, education and government services’. The International Fiscal Association ("IFA") has, for the purpose of the National and General Reports released at the 55^th Congress held in October, 2001, defined e-commerce to be ‘commercial transactions in which the order is placed electronically and goods or services are delivered in tangible or electronic form and there is an ongoing commercial relationship’. The transactions may be on an open network using non-proprietary protocols, like the Internet, or over proprietary networks like intranet or extranet’. Discrete sales (sporadic sales that do not involve substantial amounts) and transactions involving the use of electronic data interchange ("EDI") and electronic funds transfer ("EFT") and other electronic networks, that were extensively used prior to the 1990’s have been excluded from the definition. National Association of Software and Service Companies ("NASSCOM") defines e-commerce to be ‘transactions where both the offer for sale and the acceptance of offer are made electronically’. According to Dr N L Mitra of the National Law School of India, Bangalore University ‘in e-commerce, offer and acceptance is done through the Internet, almost like mail order or telephone order’.

The significant point to be noted is that as defined above, e-commerce would include transactions involving delivery and payment in traditional manner if offer and acceptance of the offer is through a ‘network’. The above definitions of e-commerce are crucial from the perspective of understanding the nature of transactions and the manner in which such transactions change traditional business practices.

Let us suppose that a resident of country X (A Ltd) is a retailer selling a wide range of goods and/ or services. A Ltd is contemplating entering the market for country Y’s customers. A Ltd plans to have no offices, warehouses, factories or other facilities in country Y and no employees of A Ltd will work in country Y. However, residents of country Y will be able to purchase goods from A Ltd by logging on to A Ltd’s website on the Internet.

In order to establish an Internet presence, A Ltd arranges with an Internet service provider to establish a connection between his website, hosted on a server, to the Internet. A Ltd could maintain its own web server which is connected to the internet service provider or could lease space on the internet service provider’s server or lease space on a server owned by a third party (say a server farm like Exodus, Digital Nation, etc) that is connected to the Internet.

The customer accesses the Internet by dialing a local phone number (using a wired or wireless connection) or using a direct connection (eg a cable modem). Once logged on to the Internet, the customer surfs the Internet using a web browser (software like Netscape Navigator, Internet Explorer, etc) to locate A Ltd’s cybermall and then browses through the cybermall itself. Upon selection of the products to be purchased, he can click on a payment icon that provides the necessary credit (or debit) card information to consummate the sale. When the payment is complete, A Ltd permits the downloading of products or services that are downloadable in digital form (eg computer software, films, books, music, etc). Similarly, if the payment is for services, a videoconference may be established between the customer and A Ltd’s service personnel. If the items ordered are not downloadable, A Ltd makes shipping arrangements and the customer may download

the payment receipt and the shipping information.

The importance of conducting business electronically cannot be undermined. Most businesses are gradually moving towards the digital marketplace as it offers infinite choices. This has led to the emergence of virtual marketplaces, which are the nothing but the blossoming of real world commercial and consumer transactions into the cyber world. This transition has changed the role of technology from being a mere enabler to being the backbone of business.

The virtual workplace has now graduated to being a versatile new marketplace in itself, spinning a whole new business sphere and accompanying models, revenue streams and growth spurs. The main businesses, spurring this shift to the digital marketplace are:

• Internet Service Providers
• Application Service Providers
• Business 2 Consumer segment
• Business 2 Business segment
• Consumer 2 Business segment
• Consumer 2 Consumer segment

1.3.1 Internet Service Providers ("ISPs")

ISP’s make the Internet accessible. The service rendered by the ISP’s may be classified into:

• Primary access services - dial-up access through analog modems, dedicated access through leased lines and cable network or wholesale services provided by backbone operators (eg MCI Worldcom, VSNL, etc) ; and
• Value added services – e-mail, web hosting, Internet telephony, e-commerce services, etc

Presently, dial-up access is the single most popular access mechanism. However, with the advent of the best tools in convergence, access through cable, asymmetrical digital subscriber lines, local multi-point distribution system, etc are expected to significantly erode the number of subscribers opting for dial-up access. The single largest driver of this change is the inevitable necessity to provide greater bandwidth to Internet users.

A number of ISPs are operating in India as a result of the opening up of the sector to private players. VSNL continues to be the largest ISP in India, with approximately 60 percent market share (nearly 6 lakh subscribers). Other major private players include Satyam Infoway, Bharti-BT, Sprint RPG, Rolta, BSES, etc.

1.3.2 Application Service Provider ("ASP")

An ASP manages and delivers application capabilities to multiple entities, either over a dedicated wide area network or over the Internet. The primary benefits are:

• The cost of the application and maintenance is spread over multiple users and hence the cost per user is reduced;
• Individual users are also relieved of the responsibility of maintaining server infrastructure and operating staff; and
• The model is suitable for packaged off-the-shelf applications, which can be used by multiple users without significant customisation, etc.

Software companies such as Microsoft, Oracle, etc offer their packaged products through ASP’s. An ASP consortium has been formed in USA in May, 1999 whose members include IBM, Cisco, Citrix, Compaq, Exodus, Sun Microsystems, etc. In India, leading ISPs like Satyam and Dishnet and companies such as Wipro, Aptech, DSQ Software have also shown interest in the ASP segment.

1.3.3 Business to-Business ("B2B") segment

This segment comprises transactions between businesses via the Internet. In this segment, the entire range of activities like marketing, order processing and fulfillment, inventory valuation, material management, payment processing, financial reporting and taxation, etc can be carried out using Internet and Internet based technologies. Significant B2B players on the net are General Motors, Ford and Wal Mart.

The various business models operated in the B2B segment are as follows:

1.3.3.1 Catalog model

A catalog model creates value by aggregating suppliers and buyers. It works best in industries characterised by fragmented buyers and sellers, who transact frequently for relatively inexpensive items and in situations where demand is predictable and prices are stable. Examples include Chemdex.com, PlasticsNet.com, etc.

Chemdex.com serves as an online source of life science products such as biological chemicals and reagents. Buyers can browse through online catalogs and place orders online, which are transmitted electronically to the suppliers. Chemdex receives a commission from the sellers for each concluded transaction.

1.3.3.2 Auction model

This model is suitable where non-standard products need to be bought or sold among businesses that have very different perceptions of value for the product. The typical examples of this model are iMark for used capital equipment and Adauction for perishable online and print advertising inventory.

1.3.3.3 Exchange model

This model creates significant value in markets where demand and prices are volatile by allowing businesses to manage excess supply and peak-load demand. In an exchange suppliers and customers come together at a single site and arrive at a mutually acceptable price. PaperExchange in paper and e-Steel in steel are good examples of exchange models.

1.3.4 Business to Consumer ("B2C") segment

This segment comprises marketplace transactions where customers learn about products through online advertising, buy goods or services using credit cards, debit cards etc and receive post-purchase support through online services. The B2C segment can be used for advertising and selling products, ranging from books or CDs to T-shirts or even computers. The business models operated in the B2C segment are as follows:

1.3.4.1 Portals

A portal is the web version of a successful conglomerate that offers everything from search engines, e-mail and chat to travel, stock quotes and shopping. A portal commands the best, stickiest and highest eyeball aggregates on the net (that is the highest number of visitors who spend sufficient time on the site and have higher recollection of the site), a junction where all congregate to move out to different places.

The business model followed by a portal is simple:

Yahoo!, Altavista, Go and MSN have redefined what portals can do on the net. rediff.com, indiaworld.com, indiainfo.com, 123india.com, etc have gained popularity as the most suave Indian portals.

1.3.4.2 Vortals

Portals that are industry specific or service a niche on the net are known as ‘Vortals’. Vortals offer facilities similar to portals such as search engines, chats, discussions etc but remain restricted in scope to a particular industry/ domain, eg CNet.com, lexsite.com, etc.

CNet.com caters to the computing and technology industry targeting buyers and sellers of electronic products. lexsite is a vortal targeted towards the legal community in India and has specialised contents for legal professionals, law students and businesses.

1.3.4.3 E-tailing

E-tailing is emerging as the fastest growing segment of e-commerce. Some of the major players in the e-tailing segment include amazon.com, jaldi.com, fabmart.com, etc.

The trendsetter in this segment has been amazon.com which is an online superstore dealing in books, music, video, software, toys, games, etc. It claims over 13 million customers.

The e-retailing model is already steadily disintermediating second rung retailers in the real world.

1.3.4.4 Infomediaries

These are e-commerce models having the essential characteristic of providing specialised and precise information to customers. Its simplest manifestation is a search engine.

For instance, CharlesSchwabb.com is the largest online broker in the world providing services such as investment planning tools, industry and company analysis, daily price charts and company headlines. Its clients include domestic and international individual investors, investment managers and institutions and its revenues include commission from online trades.

Naukri.com is the leading employment infomediary in India handling nearly 10,000 job advertisements in India. Its revenues include hosting charges paid by recruiting companies, resume hosting and circulation charges paid by job seekers, commission from placement agencies and resume development charges.

1.3.4.5 E-banking

E-banking offers remote banking facility electronically. It enables the web user to make purchases online and pay for the same using an online banking facility. This system has been only recently introduced in India. For instance, ICICI.com has launched "Infinity", an internet banking service that offers services such as account information, funds transfer within accounts, bill payment, requests and intimations for cheque books, stock payment instructions etc, communication with account manager etc.

1.3.4.6 E-broking

The capital markets have also been impacted by e-commerce with sites such as E*Trade, Ameritrade, etc facilitating online broking. As per Goldman Sachs study, more than US$ 1.5 trillion of assets shall be managed on line by end 2002.

1.3.5 Customer to Business ("C2B’) segment

C2B sites enable consumers to set prices and business enterprises bid to offer products and services. The dot coms that best describe this model are priceline.com and milkar.com. In the Priceline model, customers quote the price that they are willing to pay for a product or service. The products include airline tickets, hotel bookings, car rentals, new vehicles, home finance etc. The quotes are provided by Priceline to participating sellers and in case there is a willing seller, the transaction is concluded.

The Milkar.com business model aims at facilitating cheaper buying, by aggregating individual purchasing power to get volume discounts. The products offered range from electronics, home and kitchen appliances, luggage, automobiles, fitness equipment, jewellery, software etc.

1.3.6 Consumer to Consumer ("C2C") segment

This model typically comprises auction sites where sellers can place their products for sale and buyers can bid for them. Both sellers and buyers need to be registered with the auction site. While the sellers need to pay a fixed fee to sell their products, the buyers can bid without a fee. The site brings the buyers and sellers together to conclude deals and charges a commission on the sale proceeds. Some typical e-auction sites include, ebay.com, auctionindia.com, baazee.com, napster, etc.

The major sources of online revenues are as follows:

1.4.1 Access charges

Dial-up access charges tends to be the most significant source of revenue for most ISP business models in the initial stages. It is also similar in many ways to the business model of telephone companies.

If we consider the example of an independent ISP, viz an ISP that is not a part of the telephone company, its main source of revenues is the access charges paid by each customer to be online. These charges are typically either on a flat rate monthly basis or per minute usage basis. The access charge that an ISP customer pays is in addition to any costs needed to have a telephone line available to make the connection to the ISP, in the case of dial up access.

1.4.2 Online advertising

Online advertising offers much more targeted and effective advertising than conventional advertising, thereby resulting in ever growing online advertising revenues. The main reason for this is that the Internet synthesises a society of potential customers no matter what their physical location is and therefore allows advertisers to deliver direct messages to the desired audience, cost effectively.

1.4.3 Customer revenues

The main category of online customer revenue earners is the e-retailers. They specialise in providing products and services to online customers and therefore form an integral part of the B2C transactions. These online customers serve as a source of revenue for the e-retailers. The e-retailers aim at providing not only a great shopping experience but also leverage the process to offer additional value to online shoppers, especially online features like customisation and product differentiation/ classification.

1.4.4 Commission

The main earners of commission revenues are the info-intermediaries, which serve as a guide to the online customers in finding the location desired by them. They provide the customers with an automated search service that dissects the entire web in order to provide the customer the required information. These intermediaries in general take the form of search engines and portals.

The info-intermediaries can earn revenues from customers who pay the info-intermediaries subscription charges for gaining access to information and from sellers who reward the info-intermediaries for routing the customers to their sites and away from their competitors. The sellers may also pay for referring prospective buyers to them.

1.4.5 Surrogate revenues

Surrogate revenues refer to revenues earned through payments for hyperlinks and commission on sales undertaken through hyperlinks. These revenues typically arise in a situation where one portal has links established to other portals. Since the linking portal, also known as the ‘click through’ portal, serves as an advertising medium for the linked portals, it shares part of the revenues generated by such portals.

For instance, Yahoo! provides ‘click through’ links to other search engines, portals and sites.

1.4.6 Transaction revenues

In a transaction based model, products or services are sold on the web site and the consumers are charged on a per transaction basis or a fixed fee basis. Stock brokers and finance houses are among the typical businesses that use this model to perform transactions on behalf of their customers.

1.4.7 Information subscription revenues

These revenues essentially arise from subscribing to the web site/ portal. Typically, the media industry offers subscriptions of magazines and newspapers to its customers either on an unlimited access or time based access.

Electronic payment mechanisms are being revolutionised with the introduction of a variety of mechanisms in which monetary value may be stored in the form of electronic signals. These signals are stored either on plastic cards, known as a stored value card system, or on a computer drive or disk, known as the digital money system.

Factors determining security are as follows:

• Transaction security
• Identity of payer and cash issuer
• Acceptability of payments
• Irrevocability of payments
• Handling of small value payments
• Cancelling payments

Whichever way e-commerce develops, it would definitely need the support of a fast, reliable and secure financial system. An e-cash system transfers value between persons without a face to face involvement. This has been discussed in detail in the chapter on ‘Enforcement issues in electronic commerce’.

E-commerce is potentially the most important development since the industrial revolution. Its evolution during the past few years is a result of the transition from private or closed networks to open, public network platform, such as the Internet. In that sense, e-commerce can be seen as an evolution rather than a revolution.

The earliest form of e-commerce was EDI and EFT, in use for the past several decades.

EDI and EFT were relatively slow to spread because they were difficult to integrate with applications and were expensive and hard to manage. These costs and complexities limited e-commerce adoption to a minority of large companies who could invest the time, expertise and money necessary to develop value-added networks ("VAN") for undertaking transactions.

The Internet proved to be a stepping stone towards the large-scale development of e-commerce. Though the initial traces of the Internet were seen in the late 1960’s, which started as a private network, the development stage continued until the mid 1990’s when the Internet reached a broad public consciousness and attained worldwide acceptability.

Hailed as the most significant development of the century, e-commerce is engendering a wide array of innovative businesses, markets and trading communities, creating diverse functions and revenue streams.

2.2 Moores Law

Robert Moore’s prediction in 1965 that the power of chip will double every 18 months has proved to be correct ("Moores Law"), even as the prices in real terms have fallen.

In 26 years the number of transistors on a chip has increased more than 3,200 times, from 2,300 on the 4004 processor in 1971 to 7.5 million on the Pentium II processor. It is also well established that e-commerce cuts costs significantly. It is believed that procurement costs could be reduced by 90 percent by buying online. Banking online costs only one cent as against 27 cents via cash machine, 52 cents by telephone and US$ 1.14 by bank teller.

Chart depicting number of transistors per chip over the years

2.3 Internet penetration

According to a Goldman Sach’s study, the number of Indian Internet users is expected to grow from 0.5 million in 1998 to 9 million in 2003, which translates to a compounded annual growth rate ("CAGR") of 76 percent - the fastest in Asia. According to a NASSCOM survey, there will be about 2.5 million Internet subscribers (or 8 million Internet users) by March, 2001. This figure is expected to increase to 4.5 million Internet subscribers (15 million Internet users) by March, 2002, and 10 million Internet subscribers (32 million Internet users) by March, 2003. The difference between the two projections may be on account of recognition by NASSCOM that the number of users can be more than the number of subscribers. The use of cable television to facilitate access to the Internet may result to faster growth of the number of Internet users in India, since presently there are 37 million cable connections.

At present, India is not amongst the top 15 Internet using nations. This is primarily on account of the low PC penetration in our country. According to a NASSCOM survey, there were about 5 million PCs in India as on August 31, 2000, against a population of 1 billion.

Amongst the Asian nations, the growth of e-commerce in India between 1997 and 2003 is expected to be the highest with CAGR of 246 percent as against the CAGR of Australia (84 percent), South Korea (145 percent), China (243 percent) and Hong Kong (110 percent). An Arthur Andersen study expects 3,000 digital marketplaces to be operational by 2005.

IT enabled service exports to North America alone is expected to increase from the existing level of US$ 264 million to about US$ 4 billion by 2005, according to a report prepared by Steven’s International Consulting and reported in newspapers.

E-commerce transactions in India will, according to a NASSCOM survey, grow from US$ 27.87 million (Rs 131 crores) in 1998-99 to US$ 255.3 million (Rs 1,200 crores) in 2000-01. This estimate of e-commerce for the year 2000-2001 is about 0.05 percent of the national GDP estimate for that year of US$ 466 billion (Rs 21,900 billion) (Centre for Monitoring Indian Economy). According to NASSCOM-McKinsey study, e-commerce in India is likely to be between US$ 5.7 and US$ 13.4 billion by 2008 (which are the pessimistic and optimistic estimates). The B2B segment is expected to account for 90 percent of the total e-commerce in India (Indian Credit Rating Agency). Some of the segments which are likely to show significant growth by the year 2008 are financial services (US$ 0.4 to 2.1 billion), travel and hospitality (US$ 0.3 to 1.8 billion), computing & electronics (US$ 0.3 to 2.0 billion), chemical and petro products (US$ 0.5 to 1.3 billion) and automotive (US$ 0.2 to 0.7 billion). Amongst these segments, financial services and computing & electronics are expected to have purely domestic components whereas others will have both domestic and export components (Interview; McKinsey Analysis).

It is estimated that B2B will account for almost 80 percent of the worldwide business volumes of e-commerce by the year 2001 and that the growth rate in B2B segment business will be thrice the growth in B2C segment (Forrester Research).

A study by Securities and Exchange Board of India ("SEBI") estimates that Internet trade in shares and securities accounts for only 0.36 percent of the total trade, while in value terms the share of Internet trading is merely 0.19 percent. The main impediments to the growth of Internet trade have been identified as apprehension regarding the robustness of the hardware systems and software applications, lack of online banking and low speed of Internet access. According to the Reserve Bank of India ("RBI"), in the banking sector in India the Internet is being used, at present, only for accessing information about accounts and transfer of funds between two accounts of the same account holder or across accounts maintained within the same bank. Electronic ordering and processing with a fully integrated online payment system, whereby payment shall be made online, is likely to be in place within the next few years, in view of the security requirements for a safe medium of funds transfer. Online sale of insurance products is yet to take off.

As per ICRA report released in September 2000, e-commerce activities are expected to witness the highest growth rates in the period between 2000-2001 and 2002-2003 following the emergence of broadband and improvements in the connectivity infrastructure. It is estimated that currently there are around 50,000 dot coms which are of Indian origin or are India-oriented (established outside India with India centric content). However, the volume of e-commerce, in India, is far below the levels achieved in USA, which was about 1 percent of the total GDP in 1999. Further, the expected volume of e-commerce in India in 2001 (US$ 255.3 million) is also below the levels expected to be achieved in Australia (US$ 3 billion), China (US$ 586 million), South Korea (US$ 876 million) and Hong Kong (US$685 million).

The above data does not indicate the relative extent of domestic and cross border e-commerce in India. Data regarding likely trade outflows and trade inflows through cross border e-commerce is also not available. No data is also available for e-commerce which involves online delivery, which affects both direct and indirect taxation in a crucial manner.