The income-tax department, which is trying to find new avenues to deduct tax at source to boost direct government revenues, is examining online business transactions very carefully this year, especially in the so-called business-to-business, or B2B, market. Currently, tax deducted at source (TDS) being collected through online transactions is negligible, said a finance ministry official who did not want to be named. According to a 2006 estimate by eStats India Ltd, an Internet research and consultancy firm, the Indian online B2B market is likely to touch Rs13,550 crore by next year. The same official said the decision to take a closer look at online business transactions was taken at a conference of senior officials of the income-tax department in Bangalore in mid-July. TDS is the fastest growing segment of direct taxes, the main sources of government revenues. TDS occurs when a payer deducts taxes before the money reaches the payee. One of the most common forms of TDS happens when employers deduct taxes from salaries. TDS requires relatively little ongoing effort on the part of tax authorities. TDS is the best way to collect taxes and also the most cost-effective way, notes Gaurav Taneja, partner at Ernst and Young. Online business transactions can be loosely split into two categories: B2C, one where retail transactions take place, and B2B, where there is potential for TDS collections. TDS has become a focus area for the income-tax department recently. A few years back, the department allocated people to deal exclusively with it. Soon after, growth in TDS collections began to outstrip that of the three other sources of direct tax: advance tax, regular assessment and self-assessment. In 2007-08, TDS collections grew by 51% to more than Rs1.06 trillion from a year ago, contributing to about 34% of the overall direct tax collections of Rs 3.14 trillion. To keep the growth momentum in TDS intact, it is necessary to look at new avenues, said the finance ministry official who also participated in the Bangalore conference. While the growth rate of offline transactions indicate tax potential, both tax officials and independent experts said TDS of online transactions would be challenging as business models are often different compared with traditional ways of transacting. We need to know how a transaction is done, the ministry official said adding, that needed to be followed by a refined and non-intrusive way of collecting taxes. Looking at a transactions sequence and the way it works are important. Internet is something where there are numerous business models, Taneja noted. One challenge tax authorities are likely to face soon is that an increasing number of online transactions would see even payments being made online unlike the current situation where in a majority of cases, the deal is struck online but payment made through traditional modes such as cheques. The tax department is trained to deal with a paper trail and would need to look at alternate methods for the Web.