Taxation Rules in the E-Commerce Sector in India
The e-commerce sector in India is developing at a frenzied pace, currently estimated at $2.3 billion and slated to leap at $38 billion in the next five years. Names like Flipkart, Ebay and Amazon have become the stuff of households, what with the more than 250 million strong internet user base in India. Setting up an e-commerce startup is becoming easier and easier, with help coming in in terms of developers, designers and inventory management systems. But one thing that most prospective business owners miss talking about is the taxes. At the end of the day, you are selling products and services, and are liable to pay taxes on them. The change in the selling platform from offline to online means two things – 1. the amount of transactions occurring every day grows exponentially, making them more difficult to tax. 2. The variety of products in the market becomes seemingly unlimited, and since tax laws are product and service specific, it becomes tedious to take them into account.
In fact, major e-retail product providers like Flipkart and service providers like Uber are already under scrutiny from government bodies. Here, we tell you what you need to know about taxes in the Indian e-commerce sector.
What are the Types of Taxes that I can Expect?
1. Value Added Tax
Value Added Tax, or VAT applies only to the sale of ‘goods’. The value here, refers to the modifications made to a product before it is sold to the customer. For example, a company selling plain white t-shirts under a brand name adds value to the product in terms of the brand. It will thus have to pay VAT for the sale of the t-shirt. At the same time, a company dealing with ‘services’, like Uber, or OLX will not have to pay VAT since they are just facilitators of a particular service.
2. Service Tax
For service oriented businesses, the government uses Service Tax. ‘Service’ includes practically everything today. The list of taxable services, that was limited to 3 in 1994, has grown to a 114 today. That’s not all, this list is growing at such a rate that the government has decided to go the other way and bring out a list of ‘non-taxable services’, rather than accounting for each and every possible service.
3. Sales Tax
Sales tax is levied on the sale of a commodity, which is produced or imported and sold for the first time. If the product is sold subsequently without being processed further, it is exempt from sales tax. The sales tax in India is levied under the authority of both the Central Government Legislation (Central Sales Tax) and the State Government Legislation (Sales Tax) depending upon whether the sale of goods is inter-state or intra-state.
Which Tax do I Pay as an E-Retailer?
The net taxes that will be incurred upon your business will be comprised of both the above taxes, depending upon the business model. As we saw above, if your e-commerce business does not involve you providing ‘goods’ directly to customers, you will be exempt from VAT or sales tax. But it tends to get more complicated in the real world. Here is an example – if you are providing a product, say alarm clocks, for sale online, you will be charged with sales tax. Depending upon whether the buyer and the seller are in the same state or different, intra-state or inter-state sales taxes will be incurred. But, if the seller charges the customer for the delivery of the product, then he/she is also providing a service to the customer and thus, service tax will be levied. Finally, the product itself will also dictate the type of taxes – the taxes on selling a car will be different than taxes on selling the aforementioned alarm clocks.
What do I do to Reduce My Taxes?
Its very simple – analyse the structure of your enterprise and the relationship with the customer. What exactly are you providing to the customer? Is it just a product or is it a service too? If it is both, are you charging for the service? As an example, if you provide free delivery to the above mentioned alarm clocks, you will not have to pay taxes for the service you provided. In essence, it all comes down to analysing your business and modifying it to suit your needs.
For more information and queries, get in touch with Browntape. We are India’s leading multichannel inventory management solution providers and we are always happy to help!