Understanding Indian Taxation Laws for Digital Companies

The Indian Digital Economy has seen unprecedented growth in the recent few years. The market is poised to reach a whopping $40 billion by 2018.

Companies like Flipkart, Snapdeal, and Amazon, have amassed huge market shares, and numerous other companies are expanding with success stories each day. With over 250 million Internet users in the country, setting up e-commerce has become increasingly simplified from the vast inventory of developers, designers and content marketers that the country maintains.

However, regulatory compliances and taxation are topics often not discussed in the digital space. This is not ideal as consequently, each digital company is also selling goods or services online. Bloggers and Affiliate Marketers are also involved in the sale of services and marketing activities that invite many taxation norms.

The complexity of this new digital taxation is two-fold:

First, the digital nature of commerce increases the number of transactions exponentially and makes tracking for taxation difficult.

Secondly, the diverse range of products or services sold online makes it difficult to classify and categorize taxation, which is relatively simple in the case of offline trade.

We have also seen how companies like Flipkart and Uber have run into scrutiny from Government Bodies in the past. Therefore, it is all the more important to safeguard your business by following up to date tax norms 

Here are the types of taxes digital and e-commerce companies should expect

 

#1. Value Added Tax (VAT)

VAT applies to any and all sale of good. The value associated with VAT refers to the modifications made to the product before selling it to a customer.

For instance, if you sell apparels under a brand name then associating the brand is perceived as value addition. For any such value added, you have to pay VAT.

However, companies dealing with services like OLX, OLA and Uber will not have to pay VAT as they just facilitate a particular service.

#2. Service Tax

This tax applies to all service oriented businesses. With the Internet boom, some registered services have grown to 114 today compared to 3 in 1994.

The government is looking at the rate at which the types of services offered are growing. The value is so high that they have decided to make a list of non-taxable services rather than maintain accounts for each and every possible service.

Companies like Zomato, Ola, Uber and those involved in an online consultancy like bloggers, affiliate marketers, digital marketers and PR firms all have to pay service tax.

#3. Sales Tax

Sales tax is ideally levied when a commodity is sold. This commodity should be produced or imported and must be being sold for the first time! If the product is sold subsequently without being processed further, it is exempt from sales tax.

The sales tax framework in India is two-fold. It is levied under the authority of the Central Government Legislation (Central Sales Tax) and also the State Government Legislation.

The amount of tax you pay depends on whether your nature of trade is interstate or intrastate.

According to recent updates, we will have a unified sales tax framework by 2017 called the General Sales Tax (GST), wherein a regular sales tax will be levied across states. The Modi Government announced it earlier this year.

What kind of taxes are you liable to pay?

As discussed earlier, the nature of taxation on your business depends on its core nature. Ecommerce retailers are liable to both VAT and Sales Tax whereas service providers incur Service Tax only.

If your e-commerce business doesn’t involve channels where you directly get involved in product delivery, then you are exempt from VAT or sales tax. This is essentially the case for affiliate marketers and 3rd party delivery/logistics companies. 

However, things can get complex! 

Suppose you are selling a smart watch online. This means that you are providing a product and will be liable to sales tax.

Now, taxes will get complicated based on the buyer’s location. Depending on whether he is in the same state or some other one, interstate or intrastate taxes will be levied accordingly.

Now, suppose you charge the customer for delivery of the smart watch. This means that you are also providing a service. Now, you will have to pay service tax too!

Therefore, your financial team needs to assess these tiny details and then chalk out the final values. The product that you sell also invites speculation on tax. For instance, the taxes involved in selling a car will be different than those involved in selling the smart watch above. 

Are there any measures to keep these taxes to a minimum

First of all, if you are not into finance and accounting, then don’t try tax minimization measures yourself. It is most likely that you will commit errors that can have serious legal ramifications.

Hire professional accountants or delegate the task to your financial team. Let the experts do the job.

To carefully assess your tax potential you have to analyze the structure of your business and your relationship with the customer. For instance, if you are providing free delivery of goods, then you don’t have to pay any service tax.

However, one should honestly pay the taxes he/she is liable to pay after careful assessment of all operations and financial figures. Tax Evasion can land you in serious trouble and is punishable by incarceration.

Therefore carefully keep track of the latest taxation regulations imposed in the country and make sure your company operations and compliances are duly updated.

Robust taxation guidelines and cyber laws for the Indian Digital Economy are still under works

This may sound unfortunate, but India has consistently failed till now in the enactment of dedicated cyber security laws, digital tax frameworks and data protection laws.

Therefore, online commerce companies and other digital entities should be cautious in their dealings. This is more so when the directors of Indian companies can be held liable for cyber law and cyber security related non-compliances in India.

It can be easily said that most e-commerce companies apart from the obvious giants have unruly tax and cyber law frameworks.

The complexity increases with the increase in the diverse nature of online businesses springing up. For instance, in spite of the booming mobile payment market, regulatory compliance is ignored.

If we want a framework where real work garners maximum benefits, then Digital India will have to think out the box and use comprehensive methods to create the proper taxation and cyber regulations that can be dynamically tracked and recorded.

Similarly, businesses houses and entrepreneurs dealing with digital business ventures in general and online payment system, in particular, must comply with the requirements of Indian laws.

Akhilesh Ranjan (Joint Secretary of Foreign Tax), recently revealed various plans to introduce a comprehensive framework of taxation, compliance, and regulation in adherence with the Base Erosion and Profit Sharing (BEPS) project. 

Let us look at what kind of digital tax framework can we expect

The fundamental principle behind BEPS is that the income of MNCs should be taxed in that country where the relevant economic activities are performed and where the value is created.

This is good news for India, one of the biggest outsourcing hubs in the world and will benefit from a higher share of taxation as countries move towards BEPS. However, we do need to find our in-house fair tax solutions for our Digital economy.

The major concern with e-commerce taxation is the way accounts are accrued. Business operations can be run in another country without any physical presence. This calls for some major loopholes in taxation frameworks.

The irrationally inflated values of such e-commerce companies are based on market perception and also the purchasing power of the same market.

BEPS Action Plan-1: Dealing with Broader Tax Challenges

The report provides options to deal with taxation in a digital economy. While the detailed content is still unknown but India has incorporated various tax options into the plan.

These options do recognize the concept complexity and pose solutions like withholding tax, equalization levies in case of excise taxes and more.

Important Update: Finance Bill 2016 introduces Country-by-country Reporting

Indian companies that have consolidated global revenues of INR 5000 Crore or more will be required to maintain and furnish CBCRs to Indian tax authorities by a given date.

This report will entail the functions, income, profits and other details about all business activities carried out by the company in various countries. BEPS action plan calls for sharing of CBCRs between tax authorities of participating countries and at the same time, maintaining a high degree of confidentiality.

Plans to stop artificial avoidance of tax

There are various ways through which entrepreneurs and companies can evade taxation on foreign soil. However, companies should not be allowed to fragment local operations and escape tax on the grounds of exempted “preparatory or auxiliary” activities.

Under new tax laws, a country will only be able to tax business profits if the operations are carried through a permanent establishment in that country.

However, certain activities though carried out from a fixed place of business, are treated as preparatory and auxiliary and do not create a PE. Hence no taxing rights arise. BEPS aims at plugging this artificial avoidance of tax.

Conclusion

As an individual, it is hard to get a complete grip on the entire tax framework in any economy.

Therefore, as a business, you should make sure that your financial team is up to date and compliant with your country’s tax norms as well as the international tax regulations if you operate on a global scale!

As far as major taxation is concerned, apart from VAT, Sales and Service tax, there is always the final corporate tax that you pay on your net profits.

Stay busy!

Understanding Indian Taxation Laws for Digital Companies
5 (100%) 1 vote

Weaving Words
Chitraparna Sinha is the Director of Esmee Network and a regular contributor at BeginDot.

Understanding Indian Taxation Laws for Digital Companies

The Indian Digital Economy has seen unprecedented growth in the recent few years. The market is poised to reach a whopping $40 billion by 2018.

Companies like Flipkart, Snapdeal, and Amazon, have amassed huge market shares, and numerous other companies are expanding with success stories each day. With over 250 million Internet users in the country, setting up e-commerce has become increasingly simplified from the vast inventory of developers, designers and content marketers that the country maintains.

However, regulatory compliances and taxation are topics often not discussed in the digital space. This is not ideal as consequently, each digital company is also selling goods or services online. Bloggers and Affiliate Marketers are also involved in the sale of services and marketing activities that invite many taxation norms.

The complexity of this new digital taxation is two-fold:

First, the digital nature of commerce increases the number of transactions exponentially and makes tracking for taxation difficult.

Secondly, the diverse range of products or services sold online makes it difficult to classify and categorize taxation, which is relatively simple in the case of offline trade.

We have also seen how companies like Flipkart and Uber have run into scrutiny from Government Bodies in the past. Therefore, it is all the more important to safeguard your business by following up to date tax norms 

Here are the types of taxes digital and e-commerce companies should expect

 

#1. Value Added Tax (VAT)

VAT applies to any and all sale of good. The value associated with VAT refers to the modifications made to the product before selling it to a customer.

For instance, if you sell apparels under a brand name then associating the brand is perceived as value addition. For any such value added, you have to pay VAT.

However, companies dealing with services like OLX, OLA and Uber will not have to pay VAT as they just facilitate a particular service.

#2. Service Tax

This tax applies to all service oriented businesses. With the Internet boom, some registered services have grown to 114 today compared to 3 in 1994.

The government is looking at the rate at which the types of services offered are growing. The value is so high that they have decided to make a list of non-taxable services rather than maintain accounts for each and every possible service.

Companies like Zomato, Ola, Uber and those involved in an online consultancy like bloggers, affiliate marketers, digital marketers and PR firms all have to pay service tax.

#3. Sales Tax

Sales tax is ideally levied when a commodity is sold. This commodity should be produced or imported and must be being sold for the first time! If the product is sold subsequently without being processed further, it is exempt from sales tax.

The sales tax framework in India is two-fold. It is levied under the authority of the Central Government Legislation (Central Sales Tax) and also the State Government Legislation.

The amount of tax you pay depends on whether your nature of trade is interstate or intrastate.

According to recent updates, we will have a unified sales tax framework by 2017 called the General Sales Tax (GST), wherein a regular sales tax will be levied across states. The Modi Government announced it earlier this year.

What kind of taxes are you liable to pay?

As discussed earlier, the nature of taxation on your business depends on its core nature. Ecommerce retailers are liable to both VAT and Sales Tax whereas service providers incur Service Tax only.

If your e-commerce business doesn’t involve channels where you directly get involved in product delivery, then you are exempt from VAT or sales tax. This is essentially the case for affiliate marketers and 3rd party delivery/logistics companies. 

However, things can get complex! 

Suppose you are selling a smart watch online. This means that you are providing a product and will be liable to sales tax.

Now, taxes will get complicated based on the buyer’s location. Depending on whether he is in the same state or some other one, interstate or intrastate taxes will be levied accordingly.

Now, suppose you charge the customer for delivery of the smart watch. This means that you are also providing a service. Now, you will have to pay service tax too!

Therefore, your financial team needs to assess these tiny details and then chalk out the final values. The product that you sell also invites speculation on tax. For instance, the taxes involved in selling a car will be different than those involved in selling the smart watch above. 

Are there any measures to keep these taxes to a minimum

First of all, if you are not into finance and accounting, then don’t try tax minimization measures yourself. It is most likely that you will commit errors that can have serious legal ramifications.

Hire professional accountants or delegate the task to your financial team. Let the experts do the job.

To carefully assess your tax potential you have to analyze the structure of your business and your relationship with the customer. For instance, if you are providing free delivery of goods, then you don’t have to pay any service tax.

However, one should honestly pay the taxes he/she is liable to pay after careful assessment of all operations and financial figures. Tax Evasion can land you in serious trouble and is punishable by incarceration.

Therefore carefully keep track of the latest taxation regulations imposed in the country and make sure your company operations and compliances are duly updated.

Robust taxation guidelines and cyber laws for the Indian Digital Economy are still under works

This may sound unfortunate, but India has consistently failed till now in the enactment of dedicated cyber security laws, digital tax frameworks and data protection laws.

Therefore, online commerce companies and other digital entities should be cautious in their dealings. This is more so when the directors of Indian companies can be held liable for cyber law and cyber security related non-compliances in India.

It can be easily said that most e-commerce companies apart from the obvious giants have unruly tax and cyber law frameworks.

The complexity increases with the increase in the diverse nature of online businesses springing up. For instance, in spite of the booming mobile payment market, regulatory compliance is ignored.

If we want a framework where real work garners maximum benefits, then Digital India will have to think out the box and use comprehensive methods to create the proper taxation and cyber regulations that can be dynamically tracked and recorded.

Similarly, businesses houses and entrepreneurs dealing with digital business ventures in general and online payment system, in particular, must comply with the requirements of Indian laws.

Akhilesh Ranjan (Joint Secretary of Foreign Tax), recently revealed various plans to introduce a comprehensive framework of taxation, compliance, and regulation in adherence with the Base Erosion and Profit Sharing (BEPS) project. 

Let us look at what kind of digital tax framework can we expect

The fundamental principle behind BEPS is that the income of MNCs should be taxed in that country where the relevant economic activities are performed and where the value is created.

This is good news for India, one of the biggest outsourcing hubs in the world and will benefit from a higher share of taxation as countries move towards BEPS. However, we do need to find our in-house fair tax solutions for our Digital economy.

The major concern with e-commerce taxation is the way accounts are accrued. Business operations can be run in another country without any physical presence. This calls for some major loopholes in taxation frameworks.

The irrationally inflated values of such e-commerce companies are based on market perception and also the purchasing power of the same market.

BEPS Action Plan-1: Dealing with Broader Tax Challenges

The report provides options to deal with taxation in a digital economy. While the detailed content is still unknown but India has incorporated various tax options into the plan.

These options do recognize the concept complexity and pose solutions like withholding tax, equalization levies in case of excise taxes and more.

Important Update: Finance Bill 2016 introduces Country-by-country Reporting

Indian companies that have consolidated global revenues of INR 5000 Crore or more will be required to maintain and furnish CBCRs to Indian tax authorities by a given date.

This report will entail the functions, income, profits and other details about all business activities carried out by the company in various countries. BEPS action plan calls for sharing of CBCRs between tax authorities of participating countries and at the same time, maintaining a high degree of confidentiality.

Plans to stop artificial avoidance of tax

There are various ways through which entrepreneurs and companies can evade taxation on foreign soil. However, companies should not be allowed to fragment local operations and escape tax on the grounds of exempted “preparatory or auxiliary” activities.

Under new tax laws, a country will only be able to tax business profits if the operations are carried through a permanent establishment in that country.

However, certain activities though carried out from a fixed place of business, are treated as preparatory and auxiliary and do not create a PE. Hence no taxing rights arise. BEPS aims at plugging this artificial avoidance of tax.

Conclusion

As an individual, it is hard to get a complete grip on the entire tax framework in any economy.

Therefore, as a business, you should make sure that your financial team is up to date and compliant with your country’s tax norms as well as the international tax regulations if you operate on a global scale!

As far as major taxation is concerned, apart from VAT, Sales and Service tax, there is always the final corporate tax that you pay on your net profits.

Stay busy!

Understanding Indian Taxation Laws for Digital Companies
5 (100%) 1 vote

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