Should online businesses be taxed? Two experts come up with two opposing views.

Not the right time to tax online business

Wuhan city officials are reported to have collected more than 4.3 million yuan ($665,000) in tax from a company that sells clothes online. This has left online store owners wondering whether online businesses are now taxable. In the long term, online commerce should follow the principles of the market but imposing tax on online businesses now could lower their overall efficiency and reduce people's motivation to start an online business. Therefore, the government should plan taxation cautiously.

Collecting sales tax from online vendors may prompt people to return or stick to traditional shopping, which will increase transaction costs. Thanks to the impact of information technology, especially the Internet, many people have gradually accepted online shopping. As the habit of walking into real stores to buy something changes, even some ordinary Chinese people have begun buying online.

Take taobao for example. It is China's largest online transaction platform. In 2010, its transactions reached 30 billion yuan ($4.69 billion). And the rate has been increasing, according to latest studies. An important reason why Chinese residents are willing to buy online is the low transaction cost. Also, by buying online consumers can save time.

Online transactions have become part of many consumers' daily life. Data from taobao shows online transactions soared rapidly in recent years. This is because many companies, including some well-known brands, deliver their products directly from factories to customers, which cuts out the costs of middlemen and thus prices.

But once tax is imposed on online sales, prices of products will rise because online stores will pass on the tax burden to buyers. As a result, price-sensitive buyers will buy fewer products or stop buying online altogether.

Daily necessities comprise the largest part of online purchases. According to taobao data, in the first half of last year, the total sales of daily necessities was more than double that of 2009 and rose from being the fourth largest component to first. Every minute on average, 438 daily necessity items are sold on taobao. So taxation will have the greatest impact on online shoppers, most of whom are middle- or low-income people.

Besides, imposing tax will increase the barriers for online businesses, and thus discourage potential businesses. Most of the online transactions are between ordinary netizens because the majority of those doing business on the Internet are small private businesses. Taobao holds about 80 percent of the online market share. By the end of 2010, the website had nearly 370 million registered users, most of the shopkeepers focusing on consumer-to-consumer transactions. The shopkeepers do not necessarily need business licenses and carry on business on the basis of only their identity cards, relevant personal information and bank accounts. The minimal requirement is ideal for many Chinese to create their own working environment and realize their dreams. And to some extent, it increases the employment rate in cities.

But once the government imposes tax on Internet transactions without any deductions or exemptions, it will become difficult for many online businesses to survive. And many local governments do not want online commerce to become the realm of the wealthy.

Furthermore, even if the government imposes tax, the immature tax collecting system will make it almost impossible for it to gather proper information on taxable online businesses, let alone network transactions. Before imposing any tax, the government has to build a foolproof system to monitor every online business and capital flow, which demands huge costs.

China Internet Network Information Center figures show that in 2010, the number of online buyers doubled from the previous year, which means they are increasing three times faster than the number of netizens. Taxpayers and the tax department both want to see a reduction in taxation costs. But the credit system in the country is far from perfect, plagued as it is by low levels of financial transactions and tax consciousness. Hence, the government should think twice before imposing tax on online business, because it is related not only to the long-term stability of the taxation system, but also to economic growth, people's lives and social stability.

The author is deputy director of the Institute of Public Finance and Tax Revenue in the Central University of Finance and Economics.