CA Pankaj Kumar Agrawal
Today e-commerce has become an integral part of everyday life. Accessibility to E-commerce platforms is not a privilege but rather a necessity for most people, particularly in the urban areas. India is witnessing a digital revolution with internet becoming an integral part of its population and availability of internet in the mobile phones. With the decrease in the prices for using internet, change in lifestyle in urban areas and the convenience that internet has brought has supported this revolution.
Introduction
Electronic commerce ( E-commerce ) can provide a fundamentally new way of conducting commercial transaction. The economic distance between producers and consumers will shrink, traditional intermediaries will be replaced in many instances, new products and markets will be created, and new and far closer relationships will be forged between businesses and consumers and between the different parts of global enterprises.
New challenges will arise in areas such as taxation, where governments will continue to seek to raise revenue without distorting economic or technological choices. These changes require a reassessment both of the effectiveness of government policies towards commerce and of traditional commercial practices and procedures, most of which were formed with a much different image of commerce in mind.
What is E-commerce ?
Though there exists no standard definition for the term e-commerce, it is generally used in the sense of denoting a method of conducting business through “electronic means” rather than through conventional physical means.
“E-commerce means consumer and business transactions conducted over network, using computers and telecommunications. In other words, e-commerce refers to the exchange of goods and services for value on internet. it includes on-line shopping, on-line trading of goods and services, electronic fund transfers, electronic data exchanges and on-line trading of financial instruments.”
Such electronic means include ‘click & buy’ methods using computers as well as ‘m-commerce’ which make use of various mobile devices or smart phones. This term takes into account not just the act of purchasing goods and / or availing services through an online platform but also all other activities which are associated with any transaction such as:
1) Delivery,
2) Payment facilitation,
3) Supply chain and service management
One way of classifying e-commerce is based on parties involved in transactions. Major types are mentioned below:
- Business to Customers (B2C)
- Business to Business (B2B)
- Government to Customers (G2C)
- Government to Business (G2B)
- Customers to Customers (C2C)
Legal validity of E-Transaction:
Electronic contracts are governed by the basic principles elucidated in the Indian Contract Act, 1872, which mandates that a valid contract should have been entered with a free consent and for a lawful consideration between two adults.
It also finds recognition under section 10A of the Information Technology Act, 2000 that provides validity to e-contracts.
Accordingly, both Indian Contract Act, 1872 and Information Technology Act, 2000 needs to be read in conjunction to understand and provide legal validity to e-contracts.
Further, provisions of the Evidence Act, 1872 also provides that the evidence may be in electronic form.
The Supreme Court in Trimex International FZE Ltd. Dubai v. Vedanta Aluminum Ltd. recognizing the validity of e-transaction has held that e-mails exchanges between parties regarding mutual obligations constitute a contract
Core reasons for difference between the e-commerce transactions and the traditional business transactions
The Core reasons for difference between the e-commerce transactions and the traditional business transactions under the Income Tax Act, 1961 are absence of national boundaries, non requirement of physical presence of goods and non-requirement of physical delivery of e-commerce transactions.
Since e-commerce transactions are completed in cyberspace, it is often not clear as to the place where the transactions is effected, thereby causing difficulty in implementing source rule the taxation.
Investments in the E-Commerce Space in India
Foreign direct investment (“FDI”) in India is regulated under the Foreign Exchange Management Act 1999 (“FEMA”). The Department of Industrial Policy and Promotion (“DIPP”), Ministry of Commerce and Industry, Government of India makes policy pronouncements on FDI through Press Notes and Press Releases which are notified by the Reserve Bank of India (“RBI”) as amendments to Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000.
The consolidated FDI policy issued by the DIPP (“FDI Policy”) lays down two entry routes for investment:
- Automatic Route where foreign investments do not require prior approval of the government and
- Government / Approval Route where prior approval of the Government of India through Foreign Investment Promotion Board (“FIPB”) is required.
FDI rules and regulations for E-commerce
- 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.
These restrictions are related to sale of goods and not services.
Taxation of E-Commerce Transactions :
The Internet has changed many of the fundamental and long standing concepts of direct and indirect taxation. Governments all over the World are grappling with the various issues of taxation raised by ecommerce. This is because of lack of comprehensive understanding of:
- The communication technologies
- The complex nature of business offered through Internet business, etc.
- The modus operandi of Internet business, etc. has made the operation of tax legislations more difficult.
In absence of national boundaries and physical nature of transacting in goods/ services (as is the case with traditional commerce), taxation of e-commerce activities raises several issues. With the accessibility to internet across borders, e-commerce transactions can involve people who are resident of more than one country. Therefore, income arising out of such transactions may be taxed in more than one country.
The policies framed by the Committee on Fiscal Affairs of the Organization for Economic Cooperation and Development (“OECD”) highlighted neutrality; efficiency; certainty and simplicity; effectiveness and fairness; and flexibility as guiding principles for the taxation of e-commerce transactions.
In India, the High Powered Committee (“HPC”) constituted by the Central Board of Direct Taxes, submitted its report in February 2001. The report emphasized upon the need for introducing a separate tax regime for e-commerce transactions. The report prepared by the HPC took into account the principles laid down by the OECD albeit with some exemptions. However, based on the principle of ‘neutrality’, the HPC maintained that the existing laws are sufficient to tax e-commerce transactions and no separate regime for the taxation of e-commerce transactions is required.
Implications
Taxation of income in India is governed by the provisions of the Income Tax Act, 1961. Under the IT Act, residents are subject to tax in India on their worldwide income, whereas non-residents are taxed only on income sourced in India.
As per Section 9 of the IT Act, certain types of income (such as interest, royalty, income from any capital asset situated in India, etc), are deemed to accrue or arise in India under prescribed circumstances. However, if a non-resident taxpayer is a tax resident of a country with which India has signed a tax treaty, he is entitled to relief under the tax treaty.
Business profits are taxed at 30 percent in case of resident companies and 40 percent in case of non-resident companies (to the extent of income sourced in India).
Withholding tax of 25% is applicable on a gross basis in case of royalties and fees for technical services (“FTS”) paid to non-residents (which could be reduced under an applicable tax treaty). In case of failure to withhold, the payer could be liable for the principal tax amount, interest (at 12% per annum) and penalty (up to 100% of the principal tax amount). Further, the payer could face the risk of not being allowed to claim expense deduction (for the royalty / FTS payment) while computing its taxable profits.
With respect to taxation of income from e-commerce transactions, primarily, these are the issues:-
a) Characterization of incomee. whether income earned with respect to the use or sale of goods (particularly items such as software and electronic databases), sale of advertising space etc is royalty or business income or capital gains, and
b) Identification of the existence permanent establishment (PE) issues that may arise due to the presence of a server / other electronic terminal in India, hosting of websites or other technical equipment, etc.
c) Tracing commencing and end point of transaction
d) Lack of documentation to know the nature of contract.
e) Legal difficulties
f) Taxable jurisdiction
Indian tax authorities have been seeking to tax e-commerce and internet-based business models in a manner that conflict with international approaches. Global enterprises catering to Indian customers have faced difficulties as a consequence and there has been significant litigation in this respect, especially in relation to characterization of income and withholding taxes. Therefore, it becomes important to carefully structure e-commerce business models so as to mitigate tax risks, especially risk of taxation in more than one country (without availability of credit for payment of taxes in countries other than the country of tax residence).
Conclusion
Laws regulating e-commerce in India are still evolving and lack clarity. Favorable regulatory environment would be key towards unleashing the potential of e-commerce and help in efficiency in operations, creation of jobs, growth of the industry, and investments in back-end infrastructure. Furthermore, the interpretation of intricate tax norms and complex inter-state taxation rules make e-commerce operations difficult to manage and to stay compliant to the laws. With the wide variety of audience the e-commerce companies cater to, compliance becomes a serious concern. Companies will need to have strong anti-corruption programs for sourcing and vendor management, as well as robust compliance frameworks. It is important for the e-commerce companies to keep a check at every stage and adhere to the relevant laws, so as to avoid fines.
(Author can be reached at [email protected])
E – Commerce is Easy Commerce !
Hindustan Times (16 Nov 2015) quotes Commerce Minister Nirmala Sitharaman as follows :
” The Government is working on the definition of E Commerce to clear the air over issues such as taxation and Foreign Investment
We have got the inputs from States . We are in the process of putting it all together ”
Not an easy task to define what is E Commerce ( and what is not ), considering all the possible permutations / combinations ( running into LAKHS of them ! ) , of the following elements :
# NATURE
* A physical ” Product ” ( Capital Goods / FMCG / Consumables / Perishables )
* A virtual ” Service ” ( Medical advice / Legal advice / Consultancy / Software etc )
# GEOGRAPHIC SPREAD
* Across National boundaries ( International Trade )
* Across State boundaries ( within India )
* Across Municipal boundaries (within a State )
# SUPPLY- CHAIN / INTERMEDIARIES
* Mfr > Distributor > Dealer > Retailer > Buyer
* Mfr > Buyer
* Any disintermediation in the above chain
# ORDER PLACEMENT / ACCEPTANCE
* In a physical location ( Shop / Store / Office / Factory / Home )
* In a virtual location (Web site/Mobile App/SMS/ Email / Phone / Video Conference )
# DELIVERY
* Physically in a Shop / Store etc where Buyer collects / picks-up from shelf
* Delivered to Buyer’s location, thru Delivery Boy
* Delivered to Buyer’s location, using a Drone
* Delivered to Buyer on his home-based 3D Printing Machine ( using internet )
# PAYMENT
* Cash against delivery
* Pre-paid / Post-paid Cheque
* Credit / Debit Cards across counter
* Credit / Debit Cards thru online Payment Gateways
* Through Mobile Wallets
* Electronic Bank Transfer
* Using Virtual Currency like Bit-Coins
* Barter of Goods or Services
# FOREIGN INVESTMENTS
* FDI in Manufacturing / Supply Chain / Payment Gateways – Apps- Mobile Wallets
* FDI in Web sites like Amazon – Flipkart – Alibaba – Snapdeal etc ( What percentage ? )
Can you think of any other ” Elements ” that I have forgotten ?
In any case , given the fact that there can be lakhs ( if not millions ) of permutations / combinations of the above-mentioned elements , one must not attempt to define what is E Commerce ( and what is not ) , by inclusion or exclusion of these elements in definition
Such a complex definition would lead to thousands of court cases involving Governments and each court interpreting the definition , differently !
The only definition that would satisfy ALL of these permutations / combinations , is :
Any exchange of ” Value ” between any number of parties , involving ,
> Goods or Services , on the part of one party
with,
> Money or its equivalent consideration , on the part of a second party
with or without using,
> Intermediary services , on the parts of any other parties
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hemen parekh
16 Nov 2015
B2BmessageBlaster
Defining E – Commerce
A report in Hindustan Times ( 15 July 2015 ) talks about a series of
meetings expected to be held today between Commerce Minister and
different stake-holders , to define ” e-Commerce ”
I am reminded of the story of the 7 blind men , each trying to describe an
elephant by touching different limbs of the animal
It was obvious they could not arrive at a commonly agreed upon description,
since their perceptions differed
Before trying to define ” e-Commerce ” , we must first define ” Commerce ”
In pre-historic times , persons produced whatever they needed to survive
Then they learned to ” barter ” things produced by each other
The only concepts were , ” need ” and ” surplus ”
That lead to introduction of a concept called ” Value ” , which manifested itself in the form of a stick , a weapon , a goat or a piece of animal skin , till it became , some sort of coin
When barter gave way to an exchange of some goods ( or service ) , for its perceived ” Value ” ( as measured in coins ) , it became ” Commerce ”
So , we can conclude that :
” E – Commerce ” is nothing more than ” Commerce ” , where such exchange of values , take place electronically , as opposed to physically . It still remains Commerce , even when perceptions differ
Hence , regulations / controls / taxation etc that govern E-Commerce should , essentially remain the same as in case of Commerce
Ditto for FDI in e-Commerce
Mere elimination of an intermediary ( Distributor / Wholesaler / Dealer / Agent / Stockist etc ) , from the ” Supply Chain ” , itself cannot be the determining criteria
A few years back , when General Motors , tried to sell its cars to end-customers , directly from its own web site , thousands of its Brick-and-Mortar dealers protested and even threatened General Motors
GM had to back-out against the vested interests !
But when Michael Dell started manufacturing computers in his garage , he took orders on his telephone and later , on his own web site.
He never appointed any dealers . This model became a roaring success and heralded the beginning of E-Commerce era ( read , ” Direct from Dell ” )
Under present guidelines , I suppose , India would allow Dell to set up a wholly-owned , local manufacturing facility , with 100 % FDI
Now , if Dell starts selling those India-made computers , directly to end-consumers , from its own web site , would not that be E-Commerce ?
An e-Commerce with 100 % FDI ?
And what about 100 % FDI by FoxConn ( Taiwan ) , wanting to set up 10 factories in India , to manufacture electronics goods , not only for Foreign giants like Apple / Samsung etc but also for local brands such as Micromax ?
Shall we insist that FoxConn cannot deliver such goods directly to Indian consumers , based on orders received on , not only web sites of Amazon / e-Bay but also on local web sites of Flipkart / SnapDeal etc ?
It is unfortunate that we , in India , always look-up to the discoveries / inventions taking place in the West ( – and in Japan / South Korea etc )
Had we encouraged Prof Jhunjhunwala ( IIT – Madras ) , we could be today , delivering internet thru common electric outlet in every home , at speeds of 100 mb ! That would have Digitized India , 5 years ago !
When ISRO sent MOM ( Mars Orbiting Mission ) , it did not call it a ” Space Ship ”
As long as the concept of ” Ship ” defines our thought processes , we will continue to ” Sail in a Sea ” – never to traverse the ” Space ” !
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hemen parekh
15 July , 2015
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PS :
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B2BmessageBlaster > Influence Policy Makers
When i purchased goods from online (e.g. flipkart, amazon, snapdeal, etc. from Delhi)and i sale in my city(Rajkot)then i can the credit of the VAT paid on the purchase of goods?
As the bill is issued by charging VAT and not CST. Is it possible while filing the VAT return we claim the VAT paid as INPUT TAX Credit?
Please answer on my mail-id: [email protected]