When e-commerce began nearly two decades ago, merchants and customers operated in a nearly tax-free regime, as the low volume of transactions did not attract government attention. With e-commerce becoming a multibillion-dollar segment and expanding towards the trillion-dollar mark, this entire industry segment has fallen under the microscopic scrutiny of the law and government, and is now subject to many indirect taxes at various stages, as described below.
The marketplace or fulfilment model of e-commerce, popularized by Amazon and Flipkart, has opened up new opportunities for the government and tax authorities to levy indirect taxes. Taxes on the supply of goods and services through e-commerce platforms in India can be imposed in three common transaction models.
(I) Foreign seller and Indian buyer. Under goods and services tax law an integrated goods and services tax (IGST) is levied at applicable rates on the sale of goods, and the buyer is required to discharge IGST liability on sales under the reverse charge mechanism.
The Customs Act, 1962, governs the import of goods into India and prescribes a basic custom duty (BCD) on such imports at the applicable rates. A social welfare surcharge at the rate of 10% of the aggregate customs duties on imported goods is also levied in addition to any other duties, taxes or cesses [local or specific taxes or levies] chargeable on the import of goods.
When e-commerce operators facilitate a sale of goods between the buyer and seller, goods and services tax (GST) provisions specify that the operator must deduct 1% of the sale amount as tax collected at source (TCS) before sending the payments to the seller.
In accordance with GST law, TCS is not required to be deducted from supplies where the recipient is required to pay tax on a reverse charge basis. Therefore, e-commerce operators do not need to collect TCS on import of goods. It is relevant to mention that the importer is required to pay BCD, the surcharge and IGST on import of goods. Usually the e-commerce operator discharges BCD and surcharge liabilities on behalf of the customer.
It is mandatory for importers and e-commerce operators to obtain necessary registrations under GST and customs laws and to comply with their provisions. In case of non-compliance, the importer or e-commerce operator will be subject to applicable taxes and penalties. Further, in any case in which a foreign e-commerce operator collects TCS, it must be registered in each Indian state. If the foreign e-commerce operator does not have a physical presence in a particular state, the foreign operator may appoint an agent on its behalf. In case of non-compliance, such a foreign e-commerce operator will be subject to applicable taxes and penalties.
(2) Both seller and buyer are in India. GST will be levied at the applicable rates for the particular product and the seller is required to set out and charge GST in its invoice. E-commerce operators facilitating a sale between the buyer and seller are required to withhold 1% as TCS of the sale amount except on exempted products.
(3) Supply of service. Where the supply of services is between two Indian companies, GST is applicable at prevailing rates and 1% TCS must be withheld except on exempt services.
Where there is a supply of services by a foreign company seller to an Indian buyer, the service recipient is required to pay IGST on import of services at applicable rates under the reverse charge mechanism. TCS, however, is not required to be collected on supplies on which the recipient is required to pay tax on a reverse charge basis, and therefore no deduction of 1% has to be made.
Where there is a supply of services by a domestic company to a foreign company, export provisions will apply and no GST will be leviable subject to some conditions. No TCS is required to be collected by the e-commerce operator in any case in which GST is not leviable.
According to GST law, every e-commerce operator has to obtain compulsory registration irrespective of the value of supply made by him/her. Similarly, all suppliers operating through an e-commerce channel face mandatory registration, except in the case of those whose turnover does not exceed ₹2 million (US$27,893) a year (and ₹1 million in special category states).
E-commerce taxation is at the beginning stages of development and those involved in this increasingly important section should keep a lookout for modifications and amendments in the law as it evolves. If in doubt, buyers, sellers and operators should seek an advance ruling to avoid adverse legal action.
Gautam Khurana is managing partner and Mamta Saluja is a senior associate at India Law Offices.
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