India’s digital trade is expected to boom from its current base of $65 billion to a massive $350 billion by 2030, and that will probably lead to many more online shops joining the big players such as Amazon, Flipkart, and Meesho. Still, quite a few of these merchants will find themselves in deep water when they first realize the implications of their tax liabilities – mostly when the notices come through. Online sellers have it really tough because they often have to deal with two completely different tax systems at the same time: the Income Tax Act, 1961 and the Goods and Services Tax (GST) law.
To make sure that your e-commerce venture complies fully with the applicable Indian tax laws, it is helpful to keep the information in this guide at hand while working. Compliance with such rules will be made easier if the seller keeps handy and regularly checks this guide on the taxation of online businesses in India, which includes TDS deductions, registration requirement of GST, etc.
What is E-commerce Taxation in India?
E-commerce taxation is the set of direct and indirect tax obligations imposed when goods or services are sold via a digital platform. In India, it means that an online seller has to comply with both the Income Tax Act, 1961, and the GST Act, 2017, as these are the tax laws that cover them.
Understanding why this two-tax system exists for online businesses helps clarify compliance requirements. For income tax purposes, we look at the seller’s earnings, whereas for GST purposes, we look at the transaction itself. This distinction makes it quite clear what tax laws an e-commerce seller should be subject to. That’s why, by keeping this in mind, sellers will be able to make the correct compliance decisions without difficulty.
What are the key components of e-commerce taxation?
The e-commerce taxation scenario in India relies heavily on three components, each of which tackles a different part of online selling.
1. Domestic Sales and GST
The implementation of Goods and Services Tax (GST) came into force on 1 July 2017 with the passage of the 101st Constitutional Amendment Act. It is a value-added, multi-tier, destination-based tax levied at every point of sale. It effectively did away with a fragmented levy of VAT, service tax, and excise, enabling a single market. Online sellers are subject to GST on each taxable supply, whether through a marketplace or their own website.
2. Income Tax and Permanent Establishment
The income from online trade is considered under the Indian tax law chapter of “Profits and Gains of Business or Profession”. For companies running online businesses internationally, it is mainly determined by the concept of a Permanent Establishment (PE) whether a company’s activities carried out in India result in a taxable presence there through servers, warehouses, or agents located in the country. Based on this, such a business may fall under Section 9 of the Indian Income-tax Act if revenues from India are taxable due to a physical presence in the country.
3. Customs on import
When goods are imported from abroad and then distributed via an e-commerce platform, Customs IGST and Social Welfare Surcharge are applicable at the time of clearance of such goods. For imports, all the cross-border e-commerce transactions involving delivery of goods and services via courier or postal mail need to be taxed. These three components together determine how much tax liability a foreign online company doing business in or importing into India is exposed to.
E-commerce and GST: Registration, TCS, and Returns
Goods and Services Tax (GST) is basically an indirect tax impacting e-commerce in India. This is a collect-and-remit model, different in nature from traditional retail methods. To facilitate compliance procedures for e-commerce sellers through an e-commerce platform, the CBIC has introduced certain specific rules which, on the flip side, also mean additional compliance requirements for them. Getting to know various aspects of GST registration limits, procedures governing Tax Collected at Source (TCS), and filing returns would go a long way for any online seller.
Who needs GST registration to sell online?
Based on Section 24(ix) of the CGST Act, a person supplying goods through an e-commerce operator will need to register himself under GST, regardless of turnover. Notification No. 34/2023, issued by the Central Board of Indirect Taxes (CBDT) and Customs on 1 October 2023 provided the small suppliers GST registration exemption for a period of seven days to register under GST.
A supplier without GST registration can sell goods through an e-commerce platform even without being registered as long as their sales are exclusively within a single State or UT and they do not handle any listed goods. But they need to acquire an enrolment number from the GST portal first. This amendment has helped millions of small-scale sellers to get involved in e-commerce platforms by avoiding the need of registering for GST compliance.
What is TCS under Section 52 and how does it work?
Under Section 52 of the CGST Act, each e-commerce platform is obliged to deduct 1% of net taxable supplies at the source, which is Tax Collected at Source. The operator has to divide it into two equal parts of 0.5% CGST and 0.5% SGST/UTGST respectively. This collected amount the dealer deposits with the revenue, and on the 10th of the next month, files GSTR-8.
Online sellers can view their TCS credits in the GSTR-2B and GSTR-2A, and then claim these credits in their GSTR-1. This is a great benefit to the sellers as tax collection by them is no longer a hassle, and the process of compliance is much simpler.
What is the GST return filing calendar for online sellers?
Penalties await those sellers of goods online whose compliance with a schedule prescribed for filings remains a paperwork that is done only late in the day. Monthly filing of GSTR-1 for outward supplies is on the 11th of the month, or quarterly if applicable, by way of the QRMP scheme. Filing of GSTR-3B, a summary return, should take place by the 20th of each month. Composition dealers are required to file CMP-08 quarterly and GSTR-4 annually.
It is also possible to be a liable person in GSTR-9 and a reconciler of such liability under GSTR-9C according to the turnover thresholds. There are late fee charges and interest charged at 18% p.a. to a taxpayer who remains in arrears after missing the specified deadlines or is a non-complying entity.
Taxation of E-commerce Transactions under the Income Tax Act
The tax laws governed by the Income Tax Act regulate direct tax obligations, including, but not limited to, advance tax, and also presumptive taxation prescribed by Section 44AD, and the provision of deducting tax at source (TDS), the latest of which has been brought more specifically for e-commerce businesses.
As per the Finance Act of 2020, which inserted Section 194-O, a new mechanism for deducting tax at source has come into force has relevance for sellers selling their products via popular platforms like Amazon, Flipkart, and Meesho, amongst others, as well.
What is Section 194-O TDS and how does it impact sellers?
Section 194-O requires the e-commerce operator to deduct TDS at 1% on the gross amount of sales or services facilitated through the platform if an aggregate of over ₹5 lakh per financial year is made. This rule has been applicable for both GST-registered and unregistered players since 1st October 2020.
TDS is deducted before remitting the payment to the seller and is submitted to the government with Form 26Q. The sellers can credit this TDS against their income tax liabilities after cross-checking with Form 26AS and Form 16A on TRACES.
Section 194-O TDS vs. GST TCS: the difference?
Occasionally, sellers may find that two separate deductions are made against their payouts and take them as the same deductions. Income tax withholding is what TDS under Section 194-O refers to, and it is different from Section 52 TCS, which is a GST collection. TDS grants a credit in favor of income tax payable, whereas TCS offers credit in the GST electronic cash ledger.
They are reflected in their respective reconciliation documents below: TDS in Form 26AS, AIS/TIS, and TCS in GSTR-2A/2B. That’s why it becomes important that businesses reconcile the two, so they are able to maintain proper books of accounts and are prevented from receiving notice from any of the concerned departments.
Who is Liable to Pay Tax on E-commerce Transactions?
According to the type of transaction model and the definition of role under GST law, the tax liability for different parties can vary. In the marketplace model, the e-commerce operator facilitates a sale, whereas the seller is the supplier. In the instance of specific services notified under Section 9(5), the operator is treated as the supplier and is liable for the payment of tax.
Difference between an e-commerce operator and an e-commerce participant
A person who owns an online platform, operates it, or manages it is called an e-commerce operator. This is defined in the CGST Act under Section 2(45). A person who sells goods or offers services on such a platform is referred to as an e-commerce participant.
An e-commerce participant is the person accountable for remittance of income tax on profits and GST on supplies. The operator collects TCS and in some instances, and in certain circumstances TDS as well, while the participant is liable for paying income tax on earnings and GST on the supplies. When it comes to specific services such as restaurant and housekeeping services, which have been notified by the government, the operator is regarded as the deemed supplier and is directly responsible for the GST payment.
What are the key Taxation Issues in E-commerce
Growing e-commerce has introduced many tax-related problems. Firstly, sellers who are present in several states have to be compliant in multiple jurisdictions per supply rules. Secondly, the sale of goods versus provision of services may result in different classification of tax rates and different HSN/SAC codes. Thirdly, for returns and refunds, credit notes and adjustment in GSTR-1 are required, and there’s a high number of sellers making an error with this part.
Fourthly, interdependence between the fees charged on marketplace, the amount spent on advertising, with the input tax credit claims, results in additional work load. Besides, foreign e-sellers have to be wary of potential establishment issues on permanent, equalisation levy, and the guidelines from OECD BEPS which are being continually updated.
International Issues in the Taxation of E-commerce & Digital Taxation
There are ways for a digital/e-commerce business to earn income from different places without physical offices. In this way, there may be no basis for a tax authority to tax them on such income in the source country. Different countries, including India, are using various unilateral/multilateral measures for their tax collection/levying. These international dimensions of tax laws should be understood by cross-border sellers and the providers of digital services.
What is Equalisation Levy, and how applicable is it in e-commerce?
The Indian government introduced the Equalisation Levy in 2016 as a measure to cope with the tax issues thrown up by the digital economy businesses. Equalisation Levy at 6% is being imposed on online advertisements while it has been at 2% for e-commerce goods or services offered by non-resident businesses.
The levy is covered under Chapter VIII of the Finance Act 2016. Its target audience has been non-residents digital service providers who get the income through digital means from India but do not have any taxable presence here. The levy has been one of the topics of controversy on the international level and its reach has been widened or narrowed with time.
Influence of OECD BEPS on digital taxation
The BEPS Action Plan – Mainly Action 1 on the tax challenges of the digitally connected businesses – of the OECD offers the basis for the digital tax policy of India on a global scale. Pillar One suggests changing the right to tax through which the digital content and services are taxed by the local countries where users and customers reside.
While Pillar Two introduces a minimum tax rate globally set at 15%. Using these initiatives, it is attempted to get the digital corporations to pay tax in the countries where their activities have created value for them and not only in the countries of incorporation.
Tax Compliance and Digital Policies: What is the Minimum Capital Required to Launch E-commerce Business in India?
Firstly, the ones planning to become sellers usually focus on knowing only how much the initial expenditure will be for setting up the business rather than the tax compliance aspects. The expenditure pattern is basically business type oriented, however, there would be some expenses common to nearly all sellers.
The cost of running a basic e-commerce business in India may lie between ₹50,000 to ₹5 lakh and depend upon the type of business one chooses. The registration of GST is free, yet incorporating a company would cost around ₹7,000 to ₹15,000. Marketplace vendor fees include listing fees, commission (5% to 20% given the category) and payment gateway fees at 2 to 3%.
Developing a website for self-hosted e-commerce platforms typically ranges between ₹25,000 and ₹2 lakh. Investment of Inventory & warehousing cost depends upon the category you are in. Loans from MSME and Mudra schemes can enable finance to the budding entrepreneurs. Knowing about these charges would allow sellers to anticipate their tax liability as well, because TDS and TCS deductions would be from the cash flow, even after the very first sale only.
E-commerce Tax & Encryption Policies: Things for Sellers
A major feature of digital transactions is data encryption of customer and payment details which in turn has a huge role when it comes to complying with tax laws. Payment gateways & marketplaces are examples of companies that employ encryption technologies for transactional safety and tax bodies are asking for precise records of such transactions. The seller must confirm that their system is capable of decoding and matching settlement statements they will be getting from different partners.
Besides this, GST provisions mandate that digital records have to be retained for audit work and that encrypted content have to be decipherable upon request from the tax authorities. It is of prime importance for the seller to learn and abide by the encryption regulations so that no problems can arise over misreporting or non-reporting of the transactions.
Final Checklist for E-Commerce Taxation in India
- Register for GST if your turnover or platform requirements mandate it
- Keep record of TDS deductions under Section 194-O on marketplace payouts
- Reconcile TCS under Section 52 with GSTR-2A/2B
- GSTR-1 and GSTR-3B should be filed before the respective due dates
- Correct HSN/SAC codes must be maintained for every product or service
- Claim input tax credit on business expenses like advertising and shipping
- Monitor thresholds for advance tax and presumptive taxation
- Review international tax implications if selling cross-border
E-commerce taxation in India follows a dual model of income tax and GST levies, the main sources of tax for such businesses. The special provisions like the TDS provision under Section 194-O and the TCS provisions under Section 52 are basically meant to capture tax at source. Knowing these mechanisms helps sellers to avoid getting into trouble through penalties and also to plan their cash flows very effectively.
Foxtax is a service that assists online sellers in understanding the taxation laws and compliance rules through the various stages, e.g., GST registration, TDS reconciliation, and digital taxation compliance. Whether starting a business or growing it through multiple platforms, developing a proper tax strategy upfront is definitely helpful in both saving time and reducing costs.
FAQ Section
Q1: Can e-commerce be considered taxable under GST?
Under GST, every supply of goods or services made via an e-commerce platform is liable to tax unless an exemption is made. The e-commerce facilitator will collect TCS at 1% and the seller will pay GST on outward supplies as the applicable rules based on the HSN or SAC code.
Q2: Do you pay sales tax on online purchases in India?
As of now, India does not have a sales tax system at the state level. In fact, GST is a uniform tax in India that has no regard for origin and only depends on the location of consumption, i.e., the destination-based principle. Depending on the category of goods, the tax rates vary, and these tax amounts are added to the product prices paid by consumers.
Q3: Which states in the US require sales tax for online purchases?
Sales tax can be levied on sales transactions that happen online by US states if there is the existence of economic nexus for the seller, generally defined as $100,000 sales or 200 transactions in a state. But, this restriction does not come into play when it is about Indian vendors who are operating within India complying with GST.
Q4: What is the penalty for not filing GST returns as an online seller?
In case of late submission of GST returns, the taxpayer is required to pay a daily late fee for each return besides also being charged an interest at the rate of 18% p.a. on taxes liable but not paid. Repeated failure to comply with such laws can result in suspension or cancellation of the GSTIN and the issuance of notices under Section 61 or 73.
Q5: Can composition dealers sell through e-commerce platforms?
As per the Notification No. 34/2023 of the CBIC, composition taxpayers are now allowed to sell their goods via e-commerce operators if their supply is only to the local area and they do not engage in transactions outside the state. The composition taxpayers need to file their CMP-08 quarterly and GSTR-4 annually.