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 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).
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 caagrawalpankaj@gmail.com)
Disclaimer:
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.
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