DECEMBER 21, 2016

By Neeraj Prasad, IRS

HARVARD Business School professor Clayton M. Christensen coined the term disruptive technology in his 1997 best-selling book, "The Innovator's Dilemma" and described it as one that displaces an established technology and shakes up the industry or a ground-breaking product that creates a completely new industry.

"Cloud Computing" defined in the report of the US National institute of Standards & Technology (NIST) as "a model for enabling ubiquitous, convenient on-demand network access to a shared pool of configurable computing resources (e.g. networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction" has all the markings of a disruptive technology .

Essentially there are three types of "CLOUD". "Public Cloud" is a cloud in which services and infrastructure are hosted off-site by a cloud provider, shared across their client base and accessed by these clients via public networks such as the internet. "Private Cloud", on the other hand use pooled services and infrastructure stored and maintained on a private network – whether physical or virtual – accessible for only one client.The "Hybrid Cloud" allows a user to maximise their efficiencies; by utilising the public cloud for non-sensitive operations while using a private setup for sensitive or mission critical operations.

Further, the types of services provided through "cloud" are Infrastructure as a Service (IaaS ), Platform as a Service (PaaS) and Software as a Service (SaaS) .IaaS refers to the delivery of virtualised computing resource as a service across a network connection.

-IaaS specifically deals with hardware or computing infrastructure delivered as a service. Offerings include virtualised server space, storage space, network connections and IP addresses. The resource is pulled from a pool of servers distributed across data centres under the provider's control, the user is then granted access to this resource in order to build their own IT platforms.

-PaaS is an extension of IaaS and describes a category of cloud computing that provides developers with environments in which to build applications, over the internet. In addition to the fundamental computing resource supplied by the hardware in an IaaS offering, PaaS models also include the software and configuration (often known as the solution stack) required to create the platform on which clients can create their applications. PaaS provides a number of benefits to enterprises, including simplifying the development process for geographically split development teams.

-SaaS is arguably the most common of the cloud computing variations; it's the term used to describe a software delivery model in which applications are hosted (usually by a provider) and made available to customers over a network connection. Microsoft, Google, Amazon Web Services, Flickr, Twitter, Facebook, etc are all popular examples of SaaS.

Entities providing "Online/ Cloud "based services would be legitimately concerned about jurisdictional issues under GST. Cloud computing suppliers as well as consumers will need to focus on the following issues .

- In what State is the cloud computing vendor located? In what State is the consumer and its server (s) located?

- Where are the vendor's server(s) located? Are certain servers (or server space) "fixed" and dedicated for specific consumers?

- What type of cloud computing is being provided (computer or date service, server space, software applications)? Is there a primary component?

The Key issue which would emerge would be that of "nexus"; does a cloud computing transaction have sufficient contacts with a State in order to allow the State to impose GST on the transaction? If a transaction occurs "in the cloud", does the transaction have sufficient contacts with any State to allow the State to pull the cloud, and its users, down to earth (i.e. establish nexus)? In order to satisfy the "nexus'' requirement, must a supplier own or use servers located in the State? Or is it sufficient that the supplier is licensing software to customers in the state and a portion of the software to customers in the State resides at least temporarily, on the customer's computer located in the State? States would be inclined to take a position that entities that derive revenue from within their respective territorial jurisdiction have a registration and intra-state tax obligation.

The signature characteristic of cloud computing is that it allows a consumer to simultaneously engage servers, storage and bandwidth on an "as needed" basis. The result is that the customer may be consuming services (computer and data services) and space, while simultaneously purchasing applications and the right to access data (lease of server space).

From GST perspective, this web of interactions would present many assessment related issues which would require streamlined and consistent handling.

A country's tax regime is a key policy instrument that may negatively or positively influence enterprise. An inadequately designed tax system (covering laws, regulations and administration) may discourage development in general and in particular in emerging fields such as "cloud computing" which require high degree of enabling environment to grow.

In the given circumstances, solution based on a centralized registration arrangement for "Cloud" based service providers would ameliorate problems to an extent. Further, a detailed framework would be required to address such supplies. In this context it would be instructive to study the EU model of taxing "cloud" based supplies along with the Internet Tax Freedom Act (1996) and the Market Fairness Act (2013) of the United States. In t he absence of clear enabling provisions to address "cloud" based supplies, jurisdictional disputes leading to tax demands are bound to arise.

Further, under IGST where there would inevitably be competing/ conflicting revenue interest between States w.r.t. a supply being intra-state or inter-state, a moot point to be pondered upon is whether assignment of IGST administrative powers to sub-national jurisdictions will have a disruptive effect on the growth prospects of "disruptive technologies" or not. This is something for all the stake holders to ponder.

A central challenge for policy makers is a careful weighing of relative advantages and disadvantages of alternative tax policy choices and design options to meet the growth objectives of the nation. With this perspective it won't be an over-emphasis to mention that the GST legal and administrative framework should be futuristic enough to take care of the twin goals of encouraging enterprise while at the same time raising revenues.

(The author is an Additional Commissioner and the views expressed in the article are strictly personal.)