CA Vikram Jain

E-Commerce is growing fast, or dying slow…!!

Today everyone is slowly and gradually coming up online to buy & sell. We as professionals need to add value to our client business by educating them and allowing them to comply with applicable laws effectively & efficiently.

Let us understand applicability of VAT on e-Commerce transactions by an example.

My friend Vaibhav sells protein supplements on various e-Commerce websites wherein his offer price charged to online buyers is Rs. 3500/- (all inclusive). Let us assume that the e-Commerce service provider charges his Commission @ “10% of offer price” plus Service Tax @ “15% of Commission” which comes to Rs. 402.50 (Rs. 350/- + Rs. 52.50). As per seller’s policy, freight up to delivery of goods to buyer shall be paid by the seller (on behalf of buyer). In this case, the freight charges included in above offer price is assumed to be Rs. 150/-. Also let us assume VAT on e-Commerce Sales @ 15% in this case.

Question 1: Calculate Amount of Sales Tax when “INVOICE” contains following details- Sales Value- Rs. 3500/- ?

Answer: Before calculating VAT, we have to read the definition of “Sale Price” as per applicable VAT Act. As per Section 2(36) of Rajasthan State Value Added Tax, “sale price” means the amount paid or payable to a dealer as consideration for the sale of any goods less any sum allowed by way of any kind of discount or rebate according to the practice normally prevailing in the trade, but inclusive of any statutory levy or any sum charged for anything done by the dealer in respect of the goods or services rendered at the time of or before the delivery thereof, except the tax imposed under this Act.

In our case, only Sale Price is given as Rs. 3500/-. As no other information is available, VAT payable shall be- Rs. 456.52 i.e. 15/115 of 3500 = Rs. 456.52

Question 2: Calculate Amount of Sales Tax when “INVOICE” contains following details- Sales Value- Rs. 3500/-; Freight- Rs. 150/- ?

Answer: As per Explanation III to Section 2(36) of RAJ VAT Act, “Where according to the terms of a contract, the cost of freight and other expenses in respect of the transportation of goods are incurred by the dealer for or on behalf of the buyer, such cost of freight and other expenses shall not be included in the sale price, if charged separately in the invoice.”

Case (i) Buyer makes online payment and provides his communication address for delivery- In this case, if the Seller clearly mentions the amount of freight charged separately in the Invoice, the VAT shall be Rs. 436.96 [15/115 of (Rs. 3500 Less: Freight charges Rs. 150/- )] = [ 15/115 of Rs.3350/- ] = Rs. 436.96.

Note: Commission- Rs. 402.50 (Rs. 350/- + 15% Service Tax) shall be payable to the e-Commerce Service Provider.

Case (ii) Goods are sold as “Cash on Delivery” – In this case, VAT shall be Rs. 456.52 (15/115 of Rs. 3500/-) because where goods are sold as “Cash on Delivery”, the ownership in goods passes to the ultimate buyer only at the time of delivery of goods and not before that. As such, cost of freight & transportation becomes a part of cost of goods sold even if the same is shown separately. Freight cannot be deducted from Sale Price for calculation of VAT.

Note: Commission- Rs. 402.50 (Rs. 350/- + 15% Service Tax) shall be payable to the e-Commerce Service Provider.

Question 3: Whether Commission Paid to e-Commerce service provider shall be deducted while calculating VAT ?

Answer: NO. As per Explanation III to Section 2(36) of RAJ VAT Act, only the expenses in respect of transportation of goods incurred by the seller for or on behalf of the buyer are to be allowed if charged separately. However, in this case, agency Commission charges are paid to the service provider for facilitating trade, for bringing the buyer & seller on a common platform. As such, Commission shall not be deducted while calculating VAT even if charged separately.

Question 4: Whether any Tax has to be deducted at source on Commission paid/payable to the e-Commerce service provider ?

Answer: If the seller is subject to Tax Audit (Turnover exceeding prescribed limit, presently – Rs. 2.00 Crore) and Commission paid/ payable exceeds the limit prescribed under Section 194H (presently- Rs. 15000/-), TDS @ 5% on Gross Amount of Commission is to be deducted at deposited with the Government. Quarterly TDS Return has to be filed and Form 16A – Certificate for deduction of Tax at Source has to be issued to the service provider.

Question 5: What if e-Commerce service provider has already deducted the full commission at the time of remitting the sale consideration to the seller ?

Answer: As per Circular no. 619 dated 04/12/1991 issued by the Income Tax Department, Tax has to be deducted by the seller on the Gross amount of commission payable to the agent and deposit the same with the Government within its due date and issue Form 16A to the agent (e-Commerce service provider in our case). On receipt of the Certificate, the e-Commerce service provider shall remit the TDS amount withheld by him to the seller.

Let us understand this with an example.

Sl. No. Particulars Amount

(Rs. in Lakhs)

1 Total online Sales incurred by Mr. Vaibhav during FY 2016-17, which amount is received by e-Commerce service provider from ultimate buyer 300.00
2 Commission Payable to e-Commerce service provider 34.50

(10% of 300.00 + ST @ 15%)

3 Net amount received by Mr. Vaibhav from e-Commerce service provider 265.50
4 Freight charges incurred on behalf of buyer, separately shown in the Invoice 15.00
5 VAT/Sales tax to be deposited with the State Government 37.17

[15/115 of (300.00 Less: Freight 15.00)]

6 Monthly TDS to be deposited by Mr. Vaibhav on Commission payable to e-Commerce service provider 1.725

(5% of 34.50)

Important Note: When Mr. Vaibhav provides Form 16A – Certificate for deduction of Tax at Source to the e-Commerce service provider, the service provider shall remit the amount withheld by him towards TDS [which is included in above table at point no. (2) above.]

Disclaimer: All facts mentioned in the above examples are imaginary and does not resemble to any person living or dead, except my dear friend Mr. Vaibhav.

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