According to a recent report by the Associated Chambers of Commerce and Industry, the Indian e-commerce industry is expected to touch the US$38 billion mark by 2016. This growth will be driven by increasing internet and mobile penetration, discounts, convenience and value added services, which have grown multifold, from US$3.8 billion in 2009 to US$23 billion in 2015.
However, despite the recent e-commerce guidelines and other reforms bringing clarity on the regulatory front, there are still challenges related to tax that are leading to litigation. These issues, if not addressed well in time, may hinder the growth of the sector as a whole.
- New e-commerce guidelines liberalize foreign direct investment regulationsThe Government has brought about a lot of relaxations in the sector by releasing the much-awaited guidelines on investments by non-residents. The new guidelines permit 100% foreign direct investment (FDI) the marketplace model through the automatic route, subject to certain conditions. Companies operating on a marketplace model only provide buyers and sellers a platform to transact, and not directly engage in selling activities.The Government has also been conscious of providing a level playing field for offline stores, resulting in measures such as control on discounts offered by e-commerce companies and capping of total sales from a group company or an individual vendor, much to the disappointment of the consumers.
- Tax regime for e-commerce and the key challenges
The income of Indian residents running e-commerce operations is taxed in India at the applicable tax rates; therefore, there is no requirement for specific provisions for them. However, there has always been a dispute on the taxability aspect of non-residents carrying out such transactions in India.The basis for the dispute is that India has traditionally adopted a source-based taxation regime for non-residents in the country, depending on physical presence in the form of a fixed place of business or a dependent agent in the source country, i.e., India. However, with e-commerce the need for a physical presence virtually ceases, which creates problems in the enforcement of tax laws. Therefore, in 2001, the 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. It maintained that the existing laws are sufficient to tax e-commerce transactions and that no separate regime is required. Accordingly, the taxation of e-commerce transactions is still governed by the extant provisions of Income-tax Act, 1961 (‘the Act’).
A) Direct tax :
- While non-residents employ several business models and mediums to carry out their e-commerce business in the country, issues around the taxability of income and the corresponding litigation are primarily on account of the following reasons:
- Characterization of income in the hands of the non-resident
– Certain types of income such as royalty and fees for technical services deemed to accrue or arise in India are taxable in India, but business profits in the absence of a permanent establishment (PE) are not. Litigation arises when tax authorities treat payments as royalty, fees for technical services, etc. instead of business income as contented by non-residents.
- 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% rate vs Sec 194J which provides for a 10% rate.
In the recently concluded Budget, the finance minister proposed 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.
B) Indirect tax:
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 afflicting 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. For instance, the Karnataka Value Added Tax (KVAT) authority is contemplating charging local VAT on transactions on e-commerce websites by treating them as “dealers” according to the provisions of the Karnataka Value Added Tax Act, 2003 (KVAT Act).
The goods and services Tax (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.
Rahul Kakkad, Senior Manager and Raghavendra Vinayakvitthal, Senior Consultant at EY has also contributed to the article.
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- Characterization of income in the hands of the non-resident