E-Commerce -Taxation Issues in India
India's e-commerce market was worth about $3.9 billion in 2009, it went up to $12.6 billion in 2013. In 2013, the e-retail segment was worth US$2.3 billion. About 70% of India's e-commerce market is travel related. According to Google India, there were 35 million online shoppers in India in 2014 Q1 and is expected to cross 100 million mark by end of year 2016. CAGR vis-à-vis a global growth rate of 8–10%. Electronics and Apparel are the biggest categories in terms of sales. By 2020, India is expected to generate $100 billion online retail revenue out of which $35 billion will be through fashion e-commerce. Online apparel sales are set to grow four times in coming years. Key drivers in Indian e-commerce are:
Large percentage of population subscribed to broadband Internet, burgeoning 3G internet users, and a recent introduction of 4G across the country.
Explosive growth of Smartphone users, soon to be world's second largest smartphone per user base.
Rising standards of living as result of fast decline in poverty rate.
Availability of much wider product range (including long tail and Direct Imports) compared to what is available at brick and mortar retailers.
Competitive prices compared to brick and mortar retail driven by disintermediation and reduced inventory and real estate costs.
Increased usage of online classified sites, with more consumer buying and selling second-hand goods.
Evolution of Million-Dollar startups like Jabong.com, Makemytrip, Flipkart etc.
India's retail market is estimated at $470 billion in 2011 and is expected to grow to $675 billion by 2016 and $850 billion by 2020, – estimated CAGR of 10%. According to Forrester, the e-commerce market in India saw the fastest growth within the Asia-Pacific Region at a CAGR of over 57% between 2012–13.
As per "India Goes Digital" a report by Avendus Capital, a leading Indian investment bank specializing in digital media and technology sector, the Indian e-commerce market is estimated at Rs 28,500 Crore ($6.3 billion) for the year 2011. Online travel constitutes a sizable portion (87%) of this market today. Online travel market in India is expected to grow at a rate of 22% over the next 4 years and reach Rs 54,800 crore ($12.2 billion) in size by 2015. Indian e-tailing industry is estimated at Rs 3,600 crore (US$800 million) in 2011 and estimated to grow to Rs 53,000 crore ($11.8 billion) in 2015.
New sector in e-commerce is online medicine. Company like Reckwing-India, Buyonkart, Healthkart already selling complementary and alternative medicine whereas NetMed has started selling prescription medicine online after raising fund from GIC and Stead view capital citing there are no dedicated online pharmacy laws in India and it is permissible to sell prescription medicine online with a legitimate license. Online sales of luxury products like jewellery has also increased over the years. Most of the retail brands have also started entering into the market and they expect at least 20% sales through online in next 2–3 years.
In order to achieve this stupendous growth we see the following factors as the major reason to act as the growth catalyst.
New e-commerce guidelines liberalize FDI regulations
The government has allowed 100% foreign direct investment (FDI) in online retail of goods and services under the so-called “marketplace model” through the automatic route, seeking to legitimize existing businesses of e-commerce companies operating in India. It also notified new rules which could potentially end the discount wars, much to the disappointment of consumers. This is because the rules now prohibit marketplaces from offering discounts and capping total sales originating from a group company or one vendor at 25%. This could, however, level the playing field with offline stores, which have witnessed a slump in footfalls corresponding to the increase in e-commerce. So far, India has allowed 100% foreign investment in business-to-business (B2B) e-commerce but none in retail e-commerce—i.e., business-to-consumer, or B2C. Even so, Indian e-commerce companies such as Flipkart and Snapdeal have been following the marketplace model—which was not defined—and attracting large foreign investments. Marketplaces essentially act as a platform connecting sellers and buyers. According to the press note issued by the department of industrial policy and promotion (DIPP), a marketplace model is an information technology platform run by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. However, DIPP has prohibited FDI in e-commerce companies that own inventories of goods and services and sell directly to consumers using online platforms. The marketplace e-commerce companies will be allowed to provide support services to sellers on their platform such as warehousing, logistics, order fulfilment, call centre and payment collection.
Tax regime for e-commerce and the key challenges
In case of Indian e-tailers who are running their operations from within the shores of India the tax implications are very straightforward and as applicable to normal business houses. However, there has always been a dispute on the taxability aspect of non-residents carrying out such businesses in India. As per Indian taxation structure the basis of tax in India has been resident based taxation while in other countries the taxation basis has been source basis. This has resulted into countries encroaching upon each other’s territory to tax the assesse. However with e-commerce transactions the need for a physical presence virtually ceases, which further creates problems in the enforcement of tax laws. Accordingly, in 2001, Central Board of Direct Taxes constituted a High Powered Committee (HPC) to contemplate the need of a separate tax regime for e-commerce transactions. The report submitted by the HPC took into consideration the principles laid down by the Organisation for Economic Co-operation and Development (OECD) for taxation of e-commerce transactions. According to the press note issued by the department of industrial policy and promotion (DIPP), a marketplace model is an information technology platform run by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.
While non-residents employ several business models and mechanisms to carry out their e-commerce business in the country, issues about the taxability of income and the subsequent litigations are primarily on account of the following reasons:
Characterization of income in the hands of the non-resident – In accordance with Sec 9 of the Income Tax Act, 1961 the taxation depends upon the residential status of the person. In case of royalty and professional services the person is taxable for any income accrued or arisen in India without any linking to the PE within India. However for business income the person taxable ought to have a permanent establishment within India. In the current scenario it is seen in many instances that the taxmen want to tax the business income (without any PE) under the head of royalty thereby creating artificial demands.
Issues surrounding PE – On the PE front, there have been issues around whether a website in India constitutes a PE for a non-resident and whether certain activities performed by an agent in India constitute a dependent agent PE.
Applicable withholding tax rates on payments made to resident e-commerce/internet companies – There has been litigation on the applicable withholding tax rates on payments to resident e-commerce companies for activities such as e-cataloging, warehousing, logistics and payment gateways. – Sec 194C which provides for 2% v. Sec 194J which provides for a 10% rate.
In the Finance Act, 2016 the government has levied an equalization levy of 6% on payments exceeding INR 1 lakh a year made to foreign e-commerce companies as consideration for online advertisement. Through this move, the Government aims to tap the income accruing to foreign e-commerce companies in India.
The indirect tax laws in India have been more of a hindrance than a driver for growth for the e-commerce sector, mainly because of the following issues:
In the case of internet-based transactions, determining the jurisdiction of VAT becomes an issue in the absence of information regarding the physical presence of entities/goods.
There is tax leakage on account of service tax paid on listing fees by vendors to portal owners, which is non-creditable against VAT payable on sales made by vendors.
The classic sale vs. service controversy is affecting e-tailers, who end up with VAT/ CST demands in various states involved in the supply chain.
The unique and varied business models in this sector make it difficult to define a broad base for tax positions —for example, the implications on prepaid sale could be different from those on COD sale.
E-tailers are also seeing increasing litigation on account of entry tax and octroi being demanded/ collected on the movement of goods.
Various states are amending their respective VAT laws to provide for taxing of e-commerce transactions.
GST which is expected to be implemented soon, would replace the current indirect tax regime and is expected to rid the e-commerce sector of the issues plaguing it. If the state of consumption gets the tax, it will eliminate all issues being raised by origination states. However, the state demanding or getting full tax earlier will lose its revenue as the consuming states will earn all the tax revenues.