India has come across a very long journey of doing the commercial transaction, right from the barter system to the electronic medium. Indeed, India is one of the countries which is seeing continuous growth in transactions being concluded over the internet. The ability of India to compete in the global market became very much possible due to the evolution of the internet.
Though the internet was prevailing in our country since 1995 where Internet services were first launched by the Videsh Sanchar Nigam Ltd, it is in the recent time that sparks off the usage of internet at a rapid pace. Whether it is a small- scale firm or large corporate houses, everyone is using the internet to gain recognization at a broader range. However, with the merit of doing business with ease and low budget, it has also raised numerous concern for the revenue collection authorities of the country. Tax is the ultimate source for running the country, and e-commerce has undoubtedly opened many gates for the people to evade the tax, which in turn is a serious threat to the economy.
Overview of Electronic Commerce (E-Commerce)
As per Section 2(44) of the CGST Act, 2017, it means the supply of goods or services or both, including digital products over a digital or electronic network. In other words, it can be defined as a mode where the transaction between buyer and seller takes place over the internet.
The significant E-Commerce types are :
- Business to Business – Refers to E-Commerce between businesses.
- Business to Consumer – Refers to E-Commerce activities between businesses and customers.
- Customer to Business – Refers to a reverse model where the customer determines the price of products and services.
- Customer to Customer – It refers to e-commerce activities which use an auction-style model.
- Mobile Commerce – Refers to a mechanism where purchase and sells happen through wireless technology such as mobile phone.
- Information can be accessed at any time from any place.
- It is very much cost-efficient and time-saving mode of doing business.
- Saving of cash inflow in term of the fact that no physical infrastructure is needed.
- Geographical boundaries are no more hindrance in doing business.
- Both customers and sellers are bestowed with opportunities for maximizing their benefits.
Reasons for increasing growth
- Wide adoption of technology across the globe.
- More people can access the internet at a minimum rate.
- Innovation is doing the business with more effectiveness.
- Cost-effective, time-efficient and ease of availability makes this option of doing business more lucrative.
Challenges regarding taxation
Since transaction between the two parties or more than two parties is happening over the electronic medium and in some cases even across the geographical boundaries, it has become challenging to determine the tax implications of each transaction.
There are several challenges which come across in E-Commerce, such as –
- Difficulties in identifying the source or origin of a transaction as well as the destination of both production and consumption location.
- Since everything happens electronically, it becomes difficult to establish the audit trail to verify the authenticity of the transaction.
- Difficulty in characterizing the nature of payment as well as the taxable and non -taxable aspects of such transaction.
- Difficulty in determining who is responsible for paying the tax and at what rate when the transaction is like a cross border.
In India, there are two types of tax, i.e. Direct tax and Indirect tax. Direct tax is imposed on the profit or income of the individual, but Indirect tax is imposed on the consumption of goods and services.
Taxability of E-Commerce transaction under Direct Tax
According to section 5(1) of Income Tax Act,1961, the total income of any resident person will be comprised of all such income –
- Received or deemed to be received in India or
- Accrues or arise or deemed to arise in India or
- Accrue or arises to him outside India.
Provided in case of a not ordinarily resident income accruing or arising outside India will not be taxable until and unless such Income is derived for the business controlled in or a profession set up in India.
In the case of Non-Resident, the total income of the person will be comprised of –
- All such income which is received or deemed to be received in India or
- All such income which accrues or arises or is deemed to arise in India
According to the Section 9(1) of Income Tax Act,1961, all income accruing or arising whether directly or indirectly through or from any business connection in India or through any asset in India or source of income in India or the transfer of capital asset located in India will be considered as income accrue or arising in India.
Further, as per explanation 2A inserted by the Finance Act,2018, the term business connection in India will include :
- Transaction in respect of any goods, services or property carried out by Non -resident in India including the provision of download of data or software in India if the aggregate of payments arising from such transaction during the previous year exceeds such amount as may be prescribed; or
- Systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed in India through digital means.
Section 194-O has been added by the Union Budget 2020, which impose a duty on E-Commerce operator to deduct TDS for facilitating any sale of goods or providing services through an E-commerce participant. The rate of TDS is 1% which should be deducted at the time of credit of the amount of sale of goods, services or both to the account of an E-Commerce participant by any other mode, whichever is earlier. However, the E-Commerce is not required to deduct the TDS if the gross amount of sale of goods, services, or both during the year does not exceed Rs 5 lakh and if the e-commerce participant has furnished his PAN or Aadhar.
For example, a proprietary firm DEF ( e-commerce participant) is selling its products through Myntra ( E.Commerce operator). Mr A buys this product online from DEF for Rs 20000/- on 1st October 2020. Here Myntra is required to deduct TDS @1% on Rs 20,000 at the time of credit to the party or making payment, whichever is earlier. In this case, TDS should be deducted on 1st October 2020.
Chapter VIII of the Finance Act,2016 provides for an equalization levy of 6% of the amount of consideration for specifies services received or receivable by a Non-Resident not having Permanent Establishment (PE) in India from a Resident in India who carries out business or profession or from a non-resident having PE in India. However, such a levy will not be attracted if the aggregate amount of consideration does not exceed Rs 1,00,000/.
The specified services are –
- Online Advertisement.
- Any provision for digital advertising space or any other facility or service for online advertisement.
- Any other services as may be specified by the Central Government through notification.
If any company falling under the below-mentioned criteria, then it will be considered that it has its permanent establishment in India:-
- It has a fixed place of business in India, and the business of a foreign enterprise is wholly or partly carried on from there.
- If it has an agent who exercises the authority to conclude contracts on behalf of the foreign enterprise and maintains the stock of goods from which the agent regularly delivers on behalf of Non-resident.
- If the employees of the foreign enterprise furnish or perform services in India, other than services covered under Royalties or Fees for technical services, for a specified period.
Taxability of E-Commerce transaction under GST
As per Sec 24(5) read with section 22(6) of the CGST Act,2017. All e-commerce operator is required to get registration if their total sale exceeds Rs 20,00,000/- in a year.
The E-Commerce transaction can happen in two ways –
- First, the seller selling its product through his website. In such a case, the normal provision of GST filling would be applicable.
- Another way the seller can sell its product through the E-Commerce platform which acts as a link between the seller and buyer, In such a case when operator executes a sell between the buyer and seller, then he is required to deduct tax at source at the rate of 1% of the sale amount before sending the payment to the seller.
As per the Indian E-Commerce Industry Report, the Indian E-Commerce market is expected to grow to the US $ 200 billion by 2026. Therefore, there is no doubt of the fact that there is a tremendous increase in the magnitude of e-commerce transaction, whether it is within the country or outside the country.
However, the recent provisions introduced in the Income-tax Act,1961 and GST are the welcoming reforms which were required to monitor the transaction carried out through the E-Commerce.
E-Commerce transaction carries a lot of challenges, but at the same time, they are the need of the hour where even the small- scale business can participate among the large pool of competition across the globe.
Basu, Subhajit. (2001). Taxation of Electronic Commerce. Journal of Information, Law and Technology. 1.
Frequently Asked Questions
- What is meant by E-Commerce and explain their types?
- What are the challenges involved in E-Commerce transaction from tax perspectives?
- What do you mean by implication of tax under both direct and Indirect tax?
- What are the reasons which led to the growth of E-Commerce transaction in India?