E-commerce, short for Electronic Commerce, encompasses the buying and selling of goods and services over the internet. It eliminates geographical barriers, allowing transactions to occur seamlessly across borders. It includes a wide range of activities, from online retailing to digital payments, and continues to evolve with advancements in technology and changes in consumer behaviour.
Currently in the digital domain, business may be conducted without regard to national boundaries and may dissolve the link between an income-producing activity and a specific location. From a certain perspective, business in digital domain doesn't seem to occur in any physical location but instead takes place in the nebulous world of "cyberspace." Persons carrying business in digital domain could be located anywhere in the world.
The Organization for Economic Cooperation and Development (OECD) has recommended, in Base Erosion and Profit Shifting (BEPS) project under Action Plan 1, several options to tackle the direct tax challenges which include modifying the existing Permanent Establishment (PE) rule to include that where an enterprise engaged in fully de-materialized digital activities would constitute a PE if it maintained a significant digital presence in another country’s economy. It further recommended a virtual fixed place of business PE in the concept of PE i.e., creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on business through that website. It also recommended imposition of a withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of a equalisation levy on consideration for certain digital transactions received by a non-resident from a resident or from a non-resident having permanent establishment in other contracting state.
What
is e-commerce Industry
E-commerce (electronic commerce) is the buying and
selling of goods and services, or the transmitting of funds or data, over an
electronic network, primarily the internet. [Exchange of goods or services for
money via electronic network, computer or smart phones]
According
to Goods & Services Tax - It is supply of goods or services or both
including digital products over digital or electronic network. The main drivers
for growth of e-commerce are Digital India, Start-up India, Promotion of
'Cashless Economy', Bharat-Net Project, Marketplace in e-commerce, RBI &
National Payment Corporation of India launched Unified Payment Interface. Other
factors like Awareness program, online shopping which saves travel cost as well
as time, discounts freebies are important factors contributing to growth in e-commerce
sector.
According
to Department of Industrial Policy and Promotion - It is
buying and selling of goods and services including digital products over
digital & electronic network including network of computers, television
channels and any other internet application used in automated manner such as
web pages, extranets, mobiles, etc.
According
to Ministry of Electronics & Information Technology - It is
a type of business model, or segment of a larger business model, that enables a
firm or individual to conduct business over an electronic network, typically
the internet.
§
“Uber, the world’s largest taxi company, owns no
vehicles.
§
Facebook, the world’s most popular media owner,
creates no content.
§
Alibaba, the most valuable retailer, has no
inventory.
§
And Airbnb, the world’s largest accommodation
provider, owns no real estate.”
Present
Laws in India
List of Indian laws, regulations and guidelines
applicable to e-commerce business are :
[1] Information Technology Act, 2000
Information
Technology Act, 2000 provides a legal framework for electronic governance,
recognizing electronic records and digital signatures. Key Provisions
§ Legal
Recognition:
Grants legal status to electronic transactions, making electronic contracts and
digital signatures valid. [The Information Technology Act, 2000, § 4, No. 21,
Acts of Parliament, 2000 (India)]
§
Data Protection: Specifies requirements for
protecting sensitive personal data and penalties for breaches. [Id. at § 43A]
[2] Consumer Protection
(E-Commerce) Rules, 2020
Overview: Notified under the Consumer
Protection Act, 2019, these rules ensure consumer rights and regulate e-Commerce
operations.
Key Provisions:
§ Fair
Trade Practices:
Mandates accurate advertisements and prohibits unfair trade practices by e-Commerce
entities. [The Consumer Protection (E-Commerce) Rules, 2020, Rule 5, G.S.R.
462(E), Gazette of India, 2020]
§ Grievance
Redressal Mechanism:
Requires e-Commerce entities to appoint a grievance officer and provide a
mechanism for addressing consumer complaints. [Id. at Rule 4(4)]
§ Disclosure
Requirements:
Compels e-Commerce entities to provide detailed information about products,
services, and sellers on their platform. [Id. at Rule 6]
[3] Foreign Exchange Management Act (FEMA), 1999
Foreign
Exchange Management Act (FEMA), 1999 This act regulates the transaction related
to foreign exchange to ensure compliance with India's foreign exchange laws.
Key Provisions for e-Commerce:
§
Foreign Investment: Guidelines for foreign direct
investment (FDI) in e-Commerce. Permits 100% FDI in marketplace models but not
in inventory based models. [The Foreign Exchange Management Act, 1999, § 6, No.
42, Acts of Parliament, 1999 (India)]
§ Reporting
Requirements:
Requires eCommerce entities with foreign investments to comply with reporting
requirements and pricing regulations. [Id. at § 10]
[4] Income Tax Act, 1961
Income
Tax Act, 1961 Governs the levy, administration, collection, and recovery of
income tax in India, including provisions specific to e-Commerce.
Key Provisions for e-Commerce:
§
Equalisation Levy: A tax on online advertisements
and digital services provided by non-resident companies. Initially set at 6%
for online advertisement, expanded in 2020 to a 2% levy on the consideration
received by e-Commerce operators from online sales of goods or services to
Indian residents or users accessing the platform from India. [The Finance Act,
2020, § 165A, No. 12, Acts of Parliament, 2020 (India)]
§
Transfer Pricing Regulations: Stringent rules to prevent profit
shifting through transactions between related parties. [The Income Tax Act,
1961, §§ 92 to 92F, No. 43, Acts of Parliament, 1961 (India)]
[5] Goods
and Services Tax Act, 2017
GST is a
comprehensive indirect tax which is levied on the manufacture, sale, and
consumption of goods and services all over India. It has replaced multiple
indirect taxes which were previously used to levied by the central and state
governments.
Provisions for e-Commerce:
§ Tax
Collection at Source (TCS):
E-commerce operators are required to collect tax at source (TCS) at the rate of
1% from suppliers on the net value of taxable supplies made through their
platform. [Section, 52 of Goods and Service Tax, 2017]
§ Registration: E-commerce operators and
suppliers must register under GST regardless of their turnover. [Section 24,
Central Goods and Service Tax, 2017]
§
Returns Filing: Regular filing of GST returns is
mandatory, detailing all transactions and TCS collected. [Section 39, Central
Goods and Service Tax, 2017]
Market size of e-commerce industry across India
Owing
to the increasing internet user base and favorable market conditions, India has
a lot of potential in the e-commerce industry. Growing at an exponential rate,
the market value of the e-commerce industry in India was 123 billion U.S
dollars in 2024. This number was estimated to reach 300 billion U.S. dollars by
2030.
After China and the US, India had the third-largest online shopper base of 150 million in Financial year 2021-22 and is expected to be 350 million by Financial year 2021-22. Between 2019 and 2026, number of online shoppers in India will reach:
§ 88 million in Rural India, showing
a Compound annual growth rate (CAGR) of 22% and
§ 263 million in Urban India showing
a CAGR of 15%.
In the fiscal year 2022-23, Government e-marketplace (GeM) achieved its highest-ever Gross Merchandise Value of USD 2011 billion. As of 2023, the e-commerce sector in India is valued at USD 70 billion, constituting approximately 7% of the country’s total retail market.
§
As
of 2022, Top 3 countries in the e-commerce market are : China, USA and Japan.
§
As
of 2022, India ranked 7th in the e-commerce Market.
Government
Initiatives
Since 2014, the Government of India
has announced various initiatives, namely Digital India, Make in India,
Start-up India, Skill India, and Innovation Fund. The timely and effective
implementation of such programs will likely support the growth of E-commerce in
the country. Some of the major initiatives taken by the Government to promote
E-commerce in India are as follows:
- Government e-Marketplace (GeM) is an online
platform for public procurement in India that was launched on 09.08.2016,
by the Ministry of Commerce and Industry with the objective of creating an
inclusive, efficient, and transparent platform for the buyers and sellers
to carry out procurement activities in a fair and competitive manner.
- As of November 2022, the GeM portal has served
12.28 million orders worth Rs. 3,34,933 crore (US$ 40.97 billion) from
5.44 million registered sellers and service providers for 62,247 buyer
organizations.
- The Government e-Marketplace (GeM) platform’s
Gross Merchandise Value (GMV) doubled in FY 2024 to cross the Rs. 4 Lakh
Crore (US$ 47.96 billion) mark, driven by a 205% surge in the procurement
of services, which accounted for nearly 50% of the total GMV.
- As of March 2024, the GeM portal served 5.8
million orders worth Rs. 3,87,006 crore (US$ 46.67 billion) with 148,245
primary buyers and 215,743 secondary buyers.
- On 04.02.2024, CSC and ONDC partnered to expand
e-commerce reach to rural areas in India. This collaboration integrates
CSC's e-Grameen app with the ONDC network, providing citizens across rural
India access to a vast e-commerce network, fostering entrepreneurship
opportunities and driving the vision of Gram Swaraj.
- On February 14, 2024, the Ministry of Defence
(MoD) announced that procurement through the Government e-Market (GeM)
portal has exceeded Rs. 1 lakh crore (US$ 12.06 billion), with nearly half
of the transactions occurring in the current fiscal year. GeM, launched in
2016, facilitates online purchases for central government ministries. MoD
has executed over 5.47 lakh orders, with approximately Rs. 45,800 crore
(US$ 5.52 billion) awarded this fiscal year. Notably, 50.7% of orders,
totalling Rs. 60,593 crore (US$ 7.31 billion) have been awarded to Micro
and Small Enterprises (MSEs). GeM has emerged as a pivotal platform for
optimizing public spending in the Defence sector, with the Ministry
showcasing a resolute commitment towards efficient procurement practices.
- In FY23, the procurement of goods and services
from the government portal crossed the Rs. 2 lakh crore (US$ 24 billion)
mark.
- In a bid to systematise the onboarding process
of retailers on e-commerce platforms, the Department for Promotion of
Industry, and Internal Trade (DPIIT) is reportedly planning to use the
Open Network for Digital Commerce (ONDC) to set protocols for cataloguing,
vendor discovery and price discovery. The department aims to provide equal
opportunities to all marketplace players to make optimum use of the
e-commerce ecosystem in the larger interest of the country and its
citizens.
- National Retail Policy: The government had
identified five areas in its proposed national retail policy—ease of doing
business, rationalisation of the licence process, digitisation of retail,
focus on reforms and an open network for digital commerce—stating that
offline retail and e-commerce need to be administered in an integral
manner.
- The Consumer Protection (e-commerce) Rules 2020
notified by the Consumer Affairs Ministry in July directed e-commerce
companies to display the country of origin alongside the product listings.
In addition, the companies will also have to reveal parameters that go
behind determining product listings on their platforms.
- Government e-Marketplace (GeM) signed a Memorandum
of Understanding (MoU) with Union Bank of India to facilitate a cashless,
paperless, and transparent payment system for an array of services in
October 2019.
- Under the Digital India movement, the
Government launched various initiatives like Umang, Start-up India Portal,
Bharat Interface for Money (BHIM) etc. to boost digitisation.
- In October 2020, Minister of Commerce, and
Industry, Mr. Piyush Goyal invited start-ups to register at the public
procurement portal, GeM, and offer goods and services to government
organisations and PSUs.
- In October 2020, amending the equalisation levy
rules of 2016, the government mandated foreign companies operating
e-commerce platforms in India to have permanent account numbers (PAN). It
imposed a 2% tax in the FY21 budget on the sale of goods or delivery of
services through a non-resident e-commerce operator.
- In order to increase the participation of
foreign players in E-commerce, the Indian Government hiked the limit of
FDI in the E-commerce marketplace model to up to 100% (in B2B models).
- Heavy investment made by the Government in
rolling out a fibre network for 5G will help boost E-commerce in India.
Top E-Commerce Companies in India
(2024)
§
Flipkart
(Founded: 2007) ...
§
Amazon
India (Founded: 2008) ...
§
Meesho
(Founded: 2015) ...
§
Myntra
(Founded: 2007) ...
§
Tata
CLiQ (Founded: 2016) ...
§
IndiaMart
(Founded: 1996) ...
§
ShopClues
(Founded: 2011) ...
§
Snapdeal
(Founded: 2010)
Main functionaries of the
e‐Commerce industry
(i) Online Travel
§
Customers
buy tickets, book hotels and purchase tour packages online. The ticketing
services can be for airlines, railways or buses
§
Makemytrip,
Yatra
(ii) E‐Retailing
§
Online
sale of products such as clothing, mobile handsets, electronics and home and
kitchen appliances among others, Booking movie tickets
§
Amazon,
Myntra, Bookmyshow
(iii) Classifieds
§
Portals
connecting buyers and sellers by providing classifieds space where the sellers
can advertise their product
§
OLX,
Sulekha
(iv) Digital Media
§
Paid
music, videos and games download
§
Flipkart,
AVS (Amazon Video Services)
(v)
Financial
§
Mobile
Wallets, Online sale of insurance, loans and mutual funds
§
Paytm
(One97), SBI
Major types of E- Commerce
E-commerce
is basically buying / selling of products/ provision of services by businesses
through an electronic medium not requiring any human interface. E-commerce is
widely considered the buying and selling of products over the internet, but any
transaction that is completed solely through electronic measures can be
considered e-commerce. E-Commerce can be sub-divided into following categories:
§ Business‐to‐Business
(B2B) ‐
Business‐to‐business (B2B) describes commerce transactions between businesses,
such as between a manufacturer and a wholesaler, or between a wholesaler and a
retailer. E.g., Snapdeal
§ Business‐to‐Consumer
(B2C) ‐
Business‐to‐consumer describes activities of businesses serving end consumers
with products and/or services. E.g., Amazon, Makemytrip, Paytm (One97)
§ Consumer‐to‐Business
(C2B) ‐
Consumer‐to‐business (C2B) is an electronic commerce business model in which
consumers (individuals) offer products and services to companies and the
companies pay them. E.g., Roundone (Referral)
§ Consumer‐to‐Consumer
(C2C) ‐
Consumer‐to‐consumer electronic commerce involves electronically facilitated
transactions between consumers usually through some third party. E.g., eBay
Examples:
§ Amazon selling goods/ software over
internet.
§ Investors trading on stock market
through website.
§ Foreign telecasting company beaming
programs over several countries
§ Google earning advertisements
through website
§ Matrimonial websites earning income
by connecting people
§ Olx and Quickr create platform for
buyers and sellers
§ CA rendering advice on phone
NOTE
OLX
India Private Limited is a Unlisted Private company incorporated on 22.05.2009.
Major Expenses Incurred
§ Website Developing Expenses
§ App Developing Expense
§ Technical Know How Expenses
Income Sources
§
Google ad sense banner: OLX uses two Google ad units, one
that is persistent throughout on the left side of the site and one right before
the listings
§
Sponsored Links: Sponsored links are those links
that you see before organic Google search results. They are always labeled as
sponsored links
§
Featured Listings: A featured Ad on OLX allows your
Ad to appear right before all the other advertisements within the same
category.
Since OLX
is registered in India, all incomes of Indian company are taxable in India.
However, the issue will arise in case of :
(a)
Payments Made to Non residents
§ Check applicability of section 195
of Income Tax Act, 1961
§ Check provisions of DTAA with the
other country where payment rendered.
§ Check provisions for 15CA/ 15CB
[specially after 01.06.2015]
(b)
Income Received from Non Residents
§ Check the nature of Income, if
taxable in India
§ Check provisions of DTAA with other
country from where income received
§ Check TDS provisions
E- Commerce Companies
[A] Companies Running Platforms
[B] Buying & selling
[C] Handling Logistics
[A]
Companies Running Platforms
§ In this model, the role of
E-Commerce player is to bring buyers and suppliers on single trading platform
i.e. to create a Mall or Common Market Place.
§ Example of such companies are : OLX,
Quickr, grofers etc
Case Analysis: OLX
§ OLX provides an interactive
platform to the sellers and buyers, where they meet and transact. OLX does not
generally charge from the sellers and buyers unless they opt for listing their
products.
§ OLX India (P) Ltd. is a Unlisted
Private company incorporated on 22.05.2009.
Major Expenses Incurred
§ Website Developing Expenses
§ App Developing Expense
§ Technical Know How Expenses
Income Sources
§ Google
ad sense banner:
OLX uses two Google ad units, one that is persistent throughout on the left
side of the site and one right before the listings
§ Sponsored
Links: Sponsored
links are those links that you see before organic Google search results. They
are always labeled as sponsored links
§ Featured
Listings: A
featured Ad on OLX allows your Ad to appear right before all the other
advertisements within the same category.
Since OLX
is registered in India, all incomes of Indian company are taxable in India.
However, the issue will arise in case of :
Payments Made to Non Residents
§ Check applicability of section 195
of Income Tax Act, 1961
§ Check provisions of DTAA with the
other country where payment rendered.
§ Check provisions for 15CA/ 15CB
[specially after 01.06.2015]
Income Received from Non Residents
§ Check the nature of Income, if
taxable in India
§ Check provisions of DTAA with other
country from where income received
§ Check TDS provisions
[B] Companies Buying & selling
§ In this model, E-Commerce player
control end to end value chain i.e. right from procurement to delivery is
controlled by service provider. These type of companies issue invoices in their
own name to the customers.
§ Examples of such type of e-commerce
companies are: Amazon, Flipkart, myntra etc
Case Analysis: Flipkart
§ Flipkart is a type of e-commerce
company which buys goods in wholesale for lesser price and sell them online in
retail. They just work as a supermarket or a retail shop and make profit on
sales but only difference is they sell everything online
§ Flipkart India Private Limited is a
Private Company incorporated on 19.09.2011. It is classified as Indian
Non-Government Company and is registered at Registrar of Companies, Bangalore.
Major
Expenses
§ Website Content Management charges
§ Apps Developing charges
§ Delivery charges/ Shipping cost
§ Buying
§ Customer care service charges
Income
Sources
§ Income from selling
Since,
Flipkart is registered in India it is a resident, all incomes of Indian company
are taxable in India. However, the issue will arise in case of :
Payments
Made to Non residents
§
Check
applicability of section 195 of Income Tax Act, 1961
§
Check
provisions of DTAA with the other country where payment rendered.
§
Check
provisions for 15CA/ 15CB
Income
Received from Non Residents
§
Check
the nature of Income, if taxable in India
§
Check
provisions of DTAA with other country from where income received
§
Check
TDS provisions.
[C] Companies Handling Logistics
In this
type of model, the ecommerce companies do not get involved in buying and
selling. Their only work is to see delivery, transportation, packing, insurance
of the product etc. Examples of such companies are: aramex, delhivery, Naaptol
etc
Case Analysis: Naaptol
Naaptol
follows the marketplace business model wherein it facilitates online and
offline sales of third party products to its customer base, in addition to
handling the customer service. In other words, it provides a platform for
merchants and sellers to sell their products through Naaptol so that small-time
merchants/sellers can reach out to a wider customer base and customers enjoy
great value-for-money Naaptol
§ Website Content Management charges
§ Apps Developing charges
§ Delivery charges/ Shipping cost
§ Customer care service charges
Income Sources
§
Commission
from sellers
An
electronic payment system, modeled for an e-commerce business, may sound simple
– a customer chooses a product to buy online, clicks ‘pay’, enters certain
credit card / bank details, and the entire transaction is complete. However,
electronic payment systems are often more complex than traditional payment
methods, as they typically involve a number of players
Players are :
§
Customer;
§
Merchant;
§
An
issuing bank - the customer’s bank;
§
An
acquiring bank - the merchant’s bank;
§
Entities
such as Master or Visa – typically associations of banks / financial
institutions, which provide an array of payment products to financial
institutions;
§
One
or more payment processors / payment gateways - that provide technology for the
receipt and processing of payment instructions and settlement, or actually
receive and hold funds received from the customer for onward payment to the
merchant; and
§
Certification
authorities, such as Payment Card Industry Security Standards Council.
E-Commerce under Consolidated FDI Policy, 2014
§ “E-commerce activities refer to the
activity of buying and selling by a company through the e-commerce platform”
§ Therefore, any buy/sale
transactions would be covered except the other forms of transactions which
could take place on e-commerce platforms such as information sharing and
advance bookings (without payments being made).
FDI regulations regarding foreign investments in E-commerce space in India
§ 100% FDI is allowed under the
automatic route (i.e. no FIPB approval is required) in companies engaged in B2B
e-commerce.
§
No
FDI is allowed in companies which engage in single brand retail trading by
means of e-commerce.
§
No
FDI is allowed in companies which engage in multi brand retail trading by means
of e-commerce
FDI in B2C businesses…..
Model-1: Market place models
§
The
online platform acts as a trading platform rather than a trader. In this case
the online platform’s clients are various sellers who own the inventory of
goods and advertise their goods on the online platform. The ultimate sale of
the goods is completed between the third party seller and the end consumer.
Other Business Models…..
§ Investing into companies engaged in
wholesale trading (where 100% FDI is allowed under the automatic route subject
to certain conditions) which owns inventory and maintains the online B2B
platform
§
Investing
into companies providing technology services (where 100% FDI is allowed under
the automatic route) which provides technology related services on an arms
length basis to e-commerce platforms.
E-Commerce Industry: The Direct Tax Perspective
[1] Levy of TDS @ 0.1%
on Domestic E-Commerce Transactions (i.e. TDS from Payment of Certain Sums by
E-commerce Operator to E-commerce Participant [Section 194-O]
Deduction of TDS by e-commerce operator has to be done
at the rate of 0.1% at the time of amount’s credit of sale of goods, services,
or both to the account of an e-commerce participant or while making payment to
an e-commerce participant by other optional modes, whichever comes first.
[1][194-O. Payment of certain sums
by e-commerce operator to e-commerce participant
(1)
Notwithstanding anything to the contrary contained in any of the provisions of
Part B of this Chapter, where sale of goods or provision of services of an
e-commerce participant is facilitated by an e-commerce operator through its
digital or electronic facility or platform (by whatever name called), such
e-commerce operator shall, at the time of credit of amount of sale or services
or both to the account of an e-commerce participant or at the time of payment
thereof to such e-commerce participant by any mode, whichever is earlier,
deduct income-tax at the rate of [1][0.1 per cent] of the gross amount of such sales or services or both.
Explanation. - For the purposes of this sub-section, any payment made by
a purchaser of goods or recipient of services directly to an e-commerce
participant for the sale of goods or provision of services or both, facilitated
by an e-commerce operator, shall be deemed to be the amount credited or paid by
the e-commerce operator to the e-commerce participant and shall be included in
the gross amount of such sale or services for the purpose of deduction of
income-tax under this sub-section.
(2) No deduction under sub-section (1) shall be made from any sum
credited or paid or likely to be credited or paid during the previous year to
the account of an e-commerce participant, being an individual or Hindu
undivided family, where the gross amount of such sale or services or both
during the previous year does not exceed five lakh rupees and such e-commerce
participant has furnished his Permanent Account Number or Aadhaar number to the
e-commerce operator.
(3) Notwithstanding anything contained in Part B of this Chapter, a
transaction in respect of which tax has been deducted by the e-commerce
operator under sub-section (1), or which is not liable to deduction under
sub-section (2), shall not be liable to tax deduction at source under any other
provision of this Chapter:
PROVIDED that the provisions of this sub-section shall not apply to any amount or aggregate of amounts received or receivable by an e-commerce operator for hosting advertisements or providing any other services which are not in connection with the sale or services referred to in sub-section (1).
(4) If any difficulty arises in giving effect to the provisions of this
section, the Board may, with the approval of the Central Government, issue
guidelines for the purpose of removing the difficulty.
(5) Every guideline issued by the Board under sub-section (4) shall be
laid before each House of Parliament, and shall be binding on the income-tax
authorities and on the e-commerce operator.
(6) For the purposes of this section, e-commerce operator shall be deemed
to be the person responsible for paying to e-commerce participant.
Explanation. - For the purposes of this section, -
(a) “electronic commerce"
means the supply of goods or services or both, including digital products, over
digital or electronic network;
(b) “e-commerce operator"
means a person who owns, operates or manages digital or electronic facility or
platform for electronic commerce;
(c) “e-commerce participant”
means a person resident in India selling goods or providing services or both,
including digital products, through digital or electronic facility or platform
for electronic commerce;
(d) “services” includes “fees for
technical services” and fees for “professional services”, as defined in the
Explanation to section 194J.]
KEY NOTE
1. Inserted by the Finance Act,
2020, with effect from 01.10.2020.
2. Substituted for the words “one
percent” by the Finance (No. 2) Act, 2024, with effect from 01.10.2024.
Applicability
of Section 194-O
Section 194-O is applicable on e-commerce participant
being resident in India selling the
goods/providing services through E-commerce platform i.e., for non-residents
this section will not be applicable.
Exception
[Section 194-O(2)]
No deduction under sub-section (1) of section 194-O
shall be made from any sum credited of paid or likely to be credited or paid
during the previous year to the account of an e-commerce participant, being an
individual or Hindu undivided family, where the gross amount of such sale or
services or both during the previous year does not exceed Rs. 5,00,000 and such
e-commerce participant has furnished his Permanent Account Number or Aadhaar
number to the e-commerce operator.
Who
is responsible to deduct TDS under section 194-O?
Any person, being E-commerce operator facilitating
sale of goods or provision of services of an E-commerce Participant through its
digital or electronic Facility or platform (by whatever name called).
For
the purpose of this section E-commerce operator shall be deemed to be the
person responsible for paying to E-commerce participant.
When
to deduct [Section 194-O(1)]
Tax should be deducted either at the time of credit of
amount of sale or services or both to the account of an e-commerce participant
OR at the time of payment thereof to such e-commerce participant by any mode,
whichever is earlier.
>
Payment made by purchaser of goods or services directly to participant shall be
deemed to be payment made by E-commerce operator to participant.
TDS is to be deducted even if
amount is directly collected by E-commerce Participant
For all transactions which have
been facilitated by E-commerce participant, TDS has to be deducted by
E-commerce operator irrespective of mode of payment to E-commerce participant.
E-commerce
Participant is defined a person resident in India selling goods or providing
services or both, including digital products, through digital or electronic
facility or platform for electronic commerce. And thus No TDS is required to be
deducted when Participant is Non Resident.
NOTE
If E-commerce operator is
Non-resident, Equalisation Levy will be applicable.
A transaction
in respect of which tax has been deducted by the e-commerce operator under
section 194-O(1), or which is not liable to deduction under section 194-O(2),
shall not be liable to tax deduction at source under any other provision of
this Chapter. Provided that the provisions of this sub-section shall not apply
to any amount or aggregate of amounts received or receivable by an e-commerce
operator for hosting advertisements or providing any other services which are
not in connection with the sale or services referred to in Section 194-O(1).
Rate of TDS under Section 194-O on
E-Commerce Transactions
TDS under this
section will be deducted by E-commerce operator for sale of goods or provision
of service facilitated by it through its digital or electronic facility or
platform at the rate of 0.1% or at the rate of 5% (for non-pan/aadhaar cases).
(a) In case PAN is available and
valid
The tax shall be deducted at the flat rate of 0.1% on
income component comprised within the amount payable by the insurance company.
The rate shall not be further increased by Surcharge and Health & Education
Cess.
|
Period |
Rate
of TDS |
|
From
01.10.2024 |
0.1% |
|
For
01.04.2021 to 30.09.2024 |
1% |
|
For
14.05.2020 to 31.03.2021 |
0.75% |
(b) In case PAN is invalid or not
available
The
rate of TDS will be 5%, if PAN is not quoted by the deductee.
Threshold limit [Section 194-O(2)]
No deduction
under sub-section 194-O(1) shall be made from any sum credited or paid or
likely to be credited or paid during the previous year to the account of an
e-commerce participant, being an individual or Hindu undivided family, where
the gross amount of such sale or services or both during the previous year does
not exceed Rs. 5,00,000 and such e-commerce participant has furnished his
Permanent Account Number or Aadhaar number to the e-commerce operator. In other
words, E-commerce operator is not required to deduct TDS. If, the amount paid
or credited to Individuals or HUF (having PAN or Aadhaar, furnishes to
e-commerce operator) during the previous year does not exceed Rs. 5,00,000.
E-commerce Participant can apply
for Lower deduction/No Deduction certificate under section 197
E-commerce
Participant can make application before TDS Assessing Officer who has a
jurisdiction over his/her/its case Lower deduction or Non-deduction of TDS as
specified under section 197 on submission of Form no. 13 and subject to
fulfillment such conditions as specified therein.
TDS Certificate
The e-commerce
operator is required to issue Form 16A to the e-commerce seller. This form can
be used by the seller to claim credit of the tax deducted while filing the
Income Tax Return.
After depositing TDS with the
income-tax department, the deductor should file Form 26Q on TRACES (TDS
Reconciliation Analysis and Correction Enabling System) to report the details
of the dividend payment.
PROVISIONS
ILLUSTRATED
Let’s say Mr. “X” is a registered
e-commerce seller on Shopify. Here are the details of his sales.
Gross sales = Rs. 6,50,000
GST @ 18% included in the above
sales = Rs. 1,17,000
Shopify’s commission @ 2.5% = Rs.
16,250
TDS
CALCULATION
E-Commerce Operator – Shopify
E-Commerce Seller – Mr. “A”
TDS = 0.1% of
6,50,000 = Rs. 650
Shopify is required to,
§
deduct
TDS of Rs. 650 at the time of credit fulfillment or making payment, whichever
is earlier.
§
file
TDS return via Form 26Q & issue form 16A to Mr. “A”.
§
If
Mr. “A” fails to furnish the PAN or Aadhaar, then TDS should be deducted @ 5%
irrespective of gross sales amount.
[2] Abolishing the Equalisation Levy (EL) of 2%
on e-commerce operators, which was introduced under the Finance Act, 2020 [By
Finance (No. 2) Act, 2024]
When
equalisation levy shall be charged?
Equalisation levy will be charged when e-commerce
supply or services is provided to following persons.
§ A person who is resident in India
§ A person who buys such goods or services or both
using internet protocol address located in India.
§ A Non resident person in the following circumstances
Ø Sale of advertisement which targets a customer in
India who is resident in India or a customer who accesses the advertisement
through internet protocol address located In India
Ø A person who buys such goods or services or both
using internet protocol address located in India.
In 2016, India levied an Equalisation Levy’ (‘EL’) of 6% on online
advertisement services provided by overseas entities, colloquially referred to
as the ‘Google tax’. As the levy was imposed and collected from service
recipients in India, no tax treaty benefit could be claimed to neutralise the
same.
Section 165- Equalization Levy
(introduced by Finance Act, 2016)
It gets triggered when -
(i) A resident person carrying on business/profession
in India or
(ii) Non-Resident having a permanent
establishment in India
makes payment for online/digital advertising to a Non-Resident not having
a permanent establishment in India.
Limit - Consideration should exceed Rs 1,00,000 per year
Liability to deduct/pay equalization
levy - Person paying for Online/Digital
Advertising
Rate - 6% of the consideration for online advertising
Exclusions - Advertisement for personal purposes
Equalization Levy (Section 165A -
introduced by Finance Act, 2020)
Effective from 01.04.2020, an
equalization levy (EL) of 2% was levied on non-resident e-commerce operators
for e-commerce supply or services made, provided, or facilitated by the
e-commerce operator. Chapter VIII of
the Finance Act, 2016 related to the equalization levy was amended by the
Finance Act, 2020 to provide for the imposition of an equalization levy (EL) of
2% was levied on non-resident e-commerce operators for e-commerce supply
or services made, provided, or facilitated by the e-commerce operator.
It gets
triggered when consideration is received by the E-Commerce Operator from
e-commerce supply or services provided by it to -
(i)
A person
resident in India
(ii)
A
Non-Resident in the specified circumstances
(iii)
A person
who buys goods or services or both using Internet Protocol Address located in
India
Limit- Sales/Turnover
of E-Commerce Operator should exceed Rs 2 crores per year from sale of
goods/services
Liability to deduct/pay equalisation
levy- E-Commerce Operator
Rate - 2% of the
consideration
Specified Exclusions
Equalisation
levy shall not be charged in the following scenarios:
(a) If
non-resident has a PE in India - Equalisation levy shall not be charged if the
non- resident providing the services has a PE in India and the service is
effectively connected with such PE.
(b) Consideration
is less than threshold limit - Equalisation levy shall not be charged if the
aggregate amount of consideration received or receivable by the non-resident
from the recipient of specified services in a previous year does not exceed Rs.
1 lakh.
(c) Service is
not received for business or profession - Equalisation levy shall not be
charged where such service is received for personal use and not for the purpose
of any business or profession.
An
“e-commerce operator” is a non-resident who owns, maintains, or manages a
digital or electronic facility or platform for the online sale of goods, the
supply of services, or both.
India
removes the 2% equalisation levy on overseas e-commerce operators to facilitate
its implementation of the OECD’s pillar one solution
Equalisation levy at the rate of 2%
shall not be applicable to consideration received or receivable for e-commerce
supply or services, on or after 01.08.2024. Any service which was liable to
equalisation levy was exempt in sub-section (50) of section 10 subject to
certain conditions. Consequently as the 2% levy hqs been made inapplicable, the
income arising from ecommerce supply or services made or provided or
facilitated on or after 01.04.2020 but before 01.08.2024 only, shall fall in
the ambit of clause (50) of section 10 of the Act.
However, India shall continue to
apply an EL of 6% on online advertisement services. Also, the new nexus rule of
SEP will remain in the domestic tax law.
Equalisation Levy on e-Commerce Supply of Goods & Provision of Services
The Finance Act 2020 has introduced
a new provision i.e., section 165A in the Equalisation Levy Act, to enhance the
scope of the Equalisation Levy, on the e-commerce supply of goods and provision
of services by a non-resident 'e-commerce operator' undertaken on or after 01.04.2020.
[3] Taxation of E-commerce under GST Regulations
GST
introduced a transparent and efficient tax system for e-commerce businesses.
The online GST portal provides a centralised platform for businesses to
register, file returns, track refunds, and manage tax-related activities. This
simplified the process of tax compliance, reduced manual paperwork, and
improved overall efficiency.
E-commerce
transactions are taxed under the GST regime as follows: Some important terms :
§
E-commerce
is the delivery of commodities, services, or both, including digital items, on
a digital or electronic network.
§
Any
individual who owns, runs, or manages a digital or electronic facility; or
platform for electronic commerce represents as an e-commerce operator.
§
Net
value of taxable supplies means the aggregate value of taxable supplies of
goods or services; or both made during any month by all registered people via
the operator; less the aggregate value of taxable supplies returned to the
suppliers during the same month.
TCS
Mechanism under GST:
Tax
Collected at Source (TCS) under GST means the tax collected by an e-commerce
operator from the consideration received by it on behalf of the supplier of
goods, or services who makes supplies through the operator’s online platform.
TCS will be charged as a percentage on the net taxable supplies. The provision
of TCS under GST is dealt under Section 52 of the CGST Act.
Issues in the taxation of
e-commerce
One
of the most pressing issues in the taxation of e-commerce is the potential for
tax fraud. Taxation fraud in e-commerce can take various forms, including
underreporting income, over reporting expenses, and failing to collect or remit
appropriate GST taxes. The digital nature of e-commerce transactions makes it
easier for businesses to evade taxes compared to traditional brick-and-mortar
establishments. For instance, companies may exploit the anonymity provided by
the internet to operate without proper registration or to shift profits to
low-tax jurisdictions, a practice known as base erosion and profit shifting
(BEPS). This creates a significant enforcement challenge for tax authorities,
who must develop new strategies and tools to detect and prevent such fraud.
Types of Tax Evasion in e-Commerce
(i)
GST Evasion: Failing to collect or remit sales
tax on online transactions.
(ii)
Income Tax Evasion: Underreporting income from
eCommerce sales to avoid paying income taxes.
(iii)
Customs Fraud: Mis declaring goods or their
value to evade customs duties.
Methods of Tax Evasion
(i)
Underreporting Sales: Sellers report lower sales
figures than actual to reduce taxable income.
(ii)
False Invoicing: Creating fake invoices or
altering real ones to reflect lower amounts.
(iii)
Using Shell Companies: Setting up shell companies in
low-tax jurisdictions to funnel profits and avoid higher taxes in the home
country.
(iv)
Carousel Fraud: Involving multiple countries in a
scheme to repeatedly reclaim VAT on the same goods, leading to substantial tax
losses.
(v)
Non-compliance with Nexus Laws: Avoiding tax obligations by
claiming no physical presence (nexus) in a jurisdiction that requires tax
collection.
Impacts of Taxation Fraud
(i) Revenue Loss: Governments lose significant
revenue, impacting public services and infrastructure.
(ii) Unfair Competition: Businesses complying with tax
laws are at a disadvantage compared to those
evading taxes.
(iii) Economic Distortion: Market distortions occur as
fraudsters can offer lower prices by not paying taxes.
(iv) Legal and Financial Risks: Businesses involved in tax fraud
face legal action, fines, and damage to reputation.
Cases of Tax Evasion done by
E-commerce Industry
[1]
Amazon's Tax Avoidance in the EU (2017)
Amazon
was investigated by the European Commission for tax avoidance practices in
Luxembourg. The company was accused of funnelling profits through a subsidiary
in Luxembourg to minimize its tax liabilities across the EU. The European
Commission ordered Luxembourg to recover approximately €250 million in unpaid taxes
from Amazon. This case highlighted the issue of profit shifting and the use of
favourable tax arrangements to evade taxes. [European Commission Press Release,
State Aid: Commission Requires Luxembourg to Recover Unpaid Taxes from Amazon
(04.10.2017), https://ec.europa.eu/commission/presscorner/detail/en/IP_17_3701]
[2] Apple’s Tax Arrangements in Ireland (2016)
Apple
faced scrutiny from the European Commission for its tax deals with Ireland,
which allowed the company to pay an effective corporate tax rate significantly
below the standard rate. The arrangement was deemed illegal state aid. The
European Commission ordered Ireland to recover €13 billion in unpaid taxes from
Apple. This case underscored the complexities of international tax law and the
aggressive tax planning strategies employed by multinational corporations. [European
Commission Press Release, State Aid: Ireland Gave Illegal Tax Benefits to Apple
Worth Up to €13 Billion (30.08.2016),
https://ec.europa.eu/commission/presscorner/detail/en/IP_16_2923]
[3] Alibaba's Falsified Sales Figures (2015)
Alibaba
was accused of falsifying sales figures to avoid higher tax liabilities. The
company allegedly inflated sales numbers during its Singles’ Day sales event,
leading to questions about the accuracy of reported earnings and corresponding
tax obligations. While specific penalties were not publicly detailed, this case
drew significant attention to the need for transparency and accuracy in
reporting sales and earnings, especially for large e Commerce platforms. [D.
Barboza & S. Tabeta, Alibaba’s Singles’ Day Fights Accusations of Inflated
Sales Figures, New York Times (10.11.2015),
https://www.nytimes.com/2015/11/11/business/international/alibabas-singles-day-fightsaccusations-of-inflated-sales-figures.html]
[4] eBay’s VAT Evasion in the UK (2016)
eBay
was implicated in facilitating VAT fraud by allowing overseas sellers to sell
goods to UK customers without charging VAT. The UK government estimated that
this fraud cost the treasury billions of pounds annually. The UK government
introduced measures requiring online marketplaces to ensure that overseas
sellers comply with VAT regulations. This included the potential for
marketplaces to be held jointly liable for VAT owed by sellers using their
platforms. [HM Treasury, Spring Budget 2017: Tackling Online VAT Fraud
(08.03.2017), https://www.gov.uk/government/publications/spring-budget-2017-documents]
Alibaba Singapore eligible for DTAA benefits; Rejects Revenue’s plea on TRC & Infomedia as DAPE
Bombay High Court dismisses
Revenue’s appeals for Assessment years 2009-10 to 2011-12
against Alibaba.Com Singapore E-Commerce Pte. Ltd. (Assessee) as devoid
of substantial question of law; Upholds ITAT finding that if the
Revenue was so convinced that Assessee’s activity in India with various
subscribers was carried out by Alibaba Hong Kong, then the Revenue was expected
to act against Alibaba Hong Kong and not the Assessee; Considering Assessee’s
Tax Residency Certificate (TRC), Certificate of Incorporation and Audited
Financial Statements, High Court concludes that Assessee alone was the economic
owner of the subscription it received from India and it was not received on
behalf of Alibaba Hong Kong; Rejects Revenue’s reliance on Supreme Court ruling
in Vodafone International Holdings B.V. v. Union of India
(2012) 341 ITR 1 (SC) arguing
that the Revenue has not blanket powers to negate or ignore the TRC, holding
that Supreme Court only observed that the TRC does not prevent the Revenue to
enquire into a possible tax fraud, which is not alleged in the present case;
Concurs with ITAT that TRC is sufficient to determine the proof of residency and
the Revenue cannot ignore valid TRC issued by the Singapore Government; High Court
notes that Assessee had a limited role in facilitating the posting of the
advertisement/ information on the web portal, the subscribers and the buyers
reach out to each other from the information provided by the Assessee and
without any participation or involvement of the Assessee; Finds that Indian
Company i.e. Infomedia 18 (P) Ltd. with which the Assessee had a co-operation
agreement was not its dependent agent permanent establishment (DAPE) as it was
an independent entrepreneur which was compensated for its services and entered
into several collaborations with others like Assessee; Also remarks that the
Assessee did not have any financial, managerial participation in Infomedia; The
appeals arose as Revenue denied the benefit of India-Singapore DTAA holding
that Assessee was merely an intermediary between the Indian subscribers and
Alibaba.com Hong Kong Ltd., thus, rejected its Certificate of Incorporation and
TRC issued by the Singapore authorities; Revenue held that Assessee’s income
was taxable in India under Section 9(1)(i) as it had ‘business connection’ in
India through Infomedia and alternatively also held that payments made by the
Indian subscribers to the Assessee taxable in India as Fees for Technical
Services (FTS); DRP, deleted the allegation of FTS but held Infomedia was
Assessee’s DAPE; ITAT allowed the Assessee’s appeals while High Court finds
that the Assessee transacted with Alibaba Hong Kong for availing web hosting
services which was not the parent company of the Assessee as wrongly presumed
by the Revenue in the assessment order; Explains the business model
wherein: (i) Alibaba.com Ltd is the owner of the IPR and of the domain name
Alibaba.com, (ii) the website is operated by Alibaba Hong Kong, (iii) the
server is located in California USA, (iv) the Assessee is doing online business
providing B2B services by providing portal for giving information about the
different products and services in the electronic form; Notes that its role is
confined to providing facility of posting and advertising or displaying the
information about the product and services; Rejects Revenue’s contention that
the Assessee was not entitled to the benefits of India-Singapore DTAA as it has
no presence in Singapore whereas the website is owned by Hong Kong based
company and Hong Kong had not DTAA with India; Condemns the entire focus of
Revenue which is that the website was registered in Hong Kong which is a
trademark of Alibaba Hong Kong which led the Revenue to deny the existence of
the Assessee as an independent entity as if the Assessee was only a front or a
shadow entity of Alibaba Hong Kong; Considers notice of assessment issued
by Singapore tax authorities to conclude that place of control and management
of the Assessee is also in Singapore, meeting of the board of directors,
web-based agreement between Alibaba Hong Kong and the Assessee, prove
that Alibaba Hong Kong has absolutely no connection or contract with the Indian
subscribers or Assessee’s customers in India and that only the alibaba.com logo
is registered in Hong Kong and Assessee only uses the website, the contractual
rights, privileges and liabilities under the agreement with the Indian
subscribers wholly lie with the Assessee; Regarding FTS, High Court notes that
ITAT rightly concluded that arrangement between Assessee and the subscribers
was for the provision of services for standard facility and not for ‘rendering
of any technical, managerial or consultancy services’ as provided in section
9(1)(vii), relying on Supreme Court ruling in CIT, Mumbai v. Kotak
Securities Ltd. (2016) 383 ITR 1 : 285 CTR 63 : 239 Taxman 139 : 67 taxmann.com
356 (SC) wherein it held that if any technology or a process
has been put to operation automatically without much human interface or
intervention, then such technology per se cannot be held as rendering of
technical services by human skills; Thus, dismisses Revenue’s appeals: - [CIT (International Taxation) v. Alibaba.Com
Singapore E-Commerce (P) Ltd. [TS-361-HC-2023(BOM)]
– Date of Judgement : 16.06.2023
(Bom.)]
Online advertising fees paid to foreign search engine company is not fees for technical services and is not taxable in India due to absence of permanent establishment of such foreign company in India
Section 9, read with sections
40(a)(i) and 5, of the Income-tax Act, 1961 and article 12 of Double Taxation
Avoidance Agreement with Ireland and USA - Income - Deemed to accrue or arise
in India [Fees for technical services] –
Assessee-company used online advertising on search engines, i.e., Google
and Yahoo, but did not deduct tax at source on payments made for same. The
Assessing Officer disallowed the payments under section 40(a)(i) for
non-deduction of tax at source, holding the amount as taxable in hands of the
search engine companies. On appeal, the Commissioner (Appeals) deleted the
disallowance on ground that Google and Yahoo did not have any permanent
establishment in India and, therefore, the amounts were not taxable in view of
the provisions of DTAA with Ireland and USA respectively. On appeal by revenue:
Facts of the case
§
Assessee is a florist- uses
advertising on search engines Google & Yahoo to generate business
§
Makes payment in respect of online
advertising to Google, Ireland and Yahoo, US
§
Does not include withhold taxes
from these payments and claimed deduction
§
Server of Google and Ireland
located outside India- they have no presence in India
§
Advertisements services provided in
a purely automated manner using algorithms and codes without human intervention
Revenue’s contention- Whether or
not income was taxable in India, assessee should have approached the AO u/s 195
of the TDS
Assessee’s contention- Payment made
was in the nature of business income of the recipient; not taxable in absence
of PE in India
Held : Payment made to Google and Yahoo for uploading and display of banner advertisement is business profit and not in the nature of ‘royalty’ followed Pinstorm
§
Search engine - present only
through a website cannot be treated as PE under basic rule, unless web servers
are also located in India - Business profits not taxable in India
§
Online advertising services
rendered by search engines completely automated and without human intervention-
payments cannot be taxed as FTS under the Act
§
Payments received by Yahoo, US not
taxable as FTS under India- US DTAA since, advertising services do not make
available any technology
§
India’ reservations on “website PE”
in OECD Commentary were not relevant in judicial analysis
§
A search engine having its presence
only in the form of website cannot create PE, unless its web servers are also
located in the relevant jurisdiction
Fees for online advertising could not be considered as fees for technical services in view of provisions of tax treaties with Ireland and USA. Therefore, such payments were not taxable in hands of foreign search engine companies under section 9 and no disallowance could be made under section 40(a)(i) for non-deduction of tax at source. [In favour of assessee] (Related Assessment year : 2005-06) – [ITO v. Right Florists (P) Ltd. (2013) 154 TTJ 142 : 143 ITD 445 : 32 taxmann.com 99 : 25 ITR(T) 639 : [TS-137-ITAT-2013 (Kol)] (ITAT Kolkata)]
Payments to Google Ireland for search engine advertisements not in the nature of royalty or fees for technical services; Yahoo India Ltd ruling relied upon; No TDS liability in India since Google Ireland does not have PE in India
Assessee company is engaged in the
business of digital advertising and internet marketing. The assessee utilises
internet search engines such as Google, Yahoo etc. to buy space in advertising
on the internet, on behalf of its clients. The assessee paid to Google Ireland,
over Rs. 1 Cr for search engine services. Google provides the online
advertising business in Asia from its office in Ireland. The assessee claimed
that Google Ireland was not taxable in India in the absence of PE and thus, did
not deduct tax at source while making the payment.
During the assessment for Assessment year 2006-07, the Assessing Officer claimed that the payment to Google Ireland was taxable as ‘fees for technical services’ and liable to TDS. The Assessing Officer accordingly invoked disallowance under section 40(a)(i) for the payments to Google, which were claimed as advertisement expenses by the assessee. The CIT(A) held that the payments to Google were in the nature of ‘royalty’ and confirmed the disallowance of the expenses.
A Mumbai bench of ITAT, ruling in favour of the assessee,
held that payments to Google Ireland were not liable to tax in India. ITAT
entirely followed the coordinate bench ruling in Yahoo India (P) Ltd [TS-290-ITAT-2011(Mum)]. ITAT, in Yahoo’s
case, had ruled that payment for banner advertisement and hosting services was
not taxable as royalty under section 9(1)(vi) of the Act. ITAT concluded that
the facts in Yahoo’s case were similar to the current payments made to Google
Ireland.
ITAT observed that “the amount paid by the assessee to M/s.
Google Ireland Ltd. for the services rendered for uploading and display of
banner advertisement on its portal was in the nature of business profit on
which no tax was deductible at source since the same was not chargeable to tax
in India in the absence of any PE of Google Ireland Ltd. in India”. [In
favour of assesse] (Related Assessment year 2006-07) – [Pinstorm Technologies (P) Ltd. v. ITO [TS-536-ITAT-2012(Mum)]
– Date of Judgement : 18.07.2012
(ITAT Mumbai)]
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