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.
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:
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.
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 income i.e. 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).
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
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This article contains interpretation of the Act and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article and Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Pankaj Kumar Agrawal accepts no responsibility for loss arising from any action taken or not taken by anyone using this publication.