E-commerce taxation policies in India

One of the less-prominent news items from last week was a report from Bengaluru about NASSCOM, the Indian IT Industry body, making a demand for uniform policy on taxation of the e-commerce industry across states in India.

As with anything tax-related, there are two aspects to it – Direct Tax (Income Tax) and Indirect Tax (Sales tax, Excise duty, Value-added tax, Customs duty and others).

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E-commerce companies are different from conventional businesses in many ways, but most striking is the way they rely on intangible assets, make widespread use of data, adopt flexible and multi-faceted business models, and their presence being primarily online. This means there is a difficulty in

  1. Characterising their income – is it business income, is it payment for service rendered, or is it a rental income?
  2. Determining their place of permanent establishment for taxation purposes (due to lack of physical presence)

Characterisation of income is critically important for determining the tax liability of an e-commerce firm. If it merely sells products, without selling any copyright, it is classified as business income. But a software vendor who also transfers the know-how, could theoretically be receiving royalty for it rather than selling a product. For an e-commerce company that sells only physical products, this is slightly less complicated, however, since their income would be in the nature of profits.

The place of establishment becomes an issue for e-commerce businesses that are based outside India or have a substantial presence outside India, since cross-border taxation is a complex minefield of international law. A company that may not have a permanent establishment in India could be subject to higher taxation at a fixed rate on the total income derived, rather than on the profit.

Within India, however, the place of establishment becomes critical for determining incidence of indirect tax. With each state having its own Sales and VAT rates, having a place of business in a low-tax state could make a difference of crores for a business. It is worth noting that Flipkart and Amazon, two of India’s biggest e-commerce companies, which had operated primarily out of Karnataka, have now set up their fulfilment centres in Telengana. Needless to say, Telengana, being a newly-formed state, has been quite willing to offer tax concessions in return for employment-generating businesses. Karnataka, on the other hand, as an established centre for the IT Industry, had recently implemented a 1% tax to be collected by e-commerce companies from their vendors – a provision that made it onerous for both parties in terms of accounting and remittance of taxes.

From indirect taxation perspective, it will be found that e-commerce companies are following one of the three models as mentioned below:

a) Inventory model :

In this model, the company engages in commerce directly. The VAT/ Sales Tax is levied on the sales of goods and is collected by the state where the seller and the buyers are present and by the exporting state, in case of inter-state sales. In such a situation, where the seller is registered in one state, has warehouse at some other state and sells goods to a person in a third state, the VAT/CST will be charged and collected by the state where the warehouse is situated and from where the goods are being supplied.

b) Marketplace model :

In case of market place model, the e-commerce company is acting as a platform, in return for a commission from the sellers of the goods and services. Service tax is levied on the commission earned. Similarly, the e-Commerce companies who are not into trading of goods and rather provide online services have to pay the service tax on the fees received against the services provided by them. For instance, downloading of software, music and travel related services or matrimonial services come under the ambit service tax.

The service tax is charged and collected by the Central Government and the place of provision is not a concern as long as it is in India.

c) Hybrid Model

In this model, the e-commerce company also provides services as warehousing, delivery and packing. However, the company, being a facilitator also has to pay service tax on its commission income and the seller has to pay VAT/CST on the sales of goods. But in a scenario, when the seller and warehouse are located in two different states, additional VAT is demanded by the state in which the warehouse of the e-commerce company is situated leading to either loss to the state where the warehouse is situated or double taxation to the company.

Flipkart, which began under the inventory model, holding it’s own stocks, has shifted to a Marketplace / Hybrid model, while Amazon, which functions using both Inventory and Marketplace model in the USA, follows mainly a Hybrid model here, without keeping its own inventory.

To conclude, we would like to emphasise that the field of e-commerce taxation is a vast one, and until a uniform GST is implemented throughout the country, it is likely to remain complex. Any entrepreneur aspiring to start a business in this sector would do well to seek detailed advice from an expert in the field before making his or her final business plan.

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