- As an online seller, you pay direct and indirect taxes on all products
- The process is similar to selling offline with just a couple of additional items
- The upcoming GST could simplify things a lot
Whether you’re someone who wants to sell their handmade items online, or you’re a brick and mortar retailer who wants to add a digital channel, there are a few things that you need to know before you can take the step. You have to be fully aware of the various kinds of taxes that apply to online sales, and ensure that you don’t get into trouble because you didn’t know about a tax you’re supposed to pay.
As per Assocham, the Indian e-Commerce industry was valued at $3.8 billion in 2009 and leapt to $23 billion in 2015.
Getting on the bandwagon would be an obvious decision. While you work your own numbers to assess the potential capital and running costs and revenue involved, we suggest that you do so wisely, taking into account and being prepared for the various taxes and levies that are and may be applicable to online businesses.
Depending on the goods and services offered, online businesses may be subject to payment of direct taxes (income tax), indirect taxes (service and sales, customs and excise et cetera) and the more recentequalisation levy. Let’s look at these taxes in some detail. As a seller, you need to be aware of all these different taxes and duties, and ensure that you’re paid up on all of them, or you could get into trouble. If you’re already running an offline business, much of this will be familiar, but if you’re just getting started as a seller and have gone online first, make sure you get help from an expert as the specifics will vary for your business.
Direct Taxes (Income Tax)
An online webstore or a business with an online presence (on any marketplace) is obliged to pay income tax as required of a resident of India under the Income Tax Act, 1961, typically 30 percent of profits from business.
Even businesses which only have an online presence in India may have to pay up to 25 percent of the profits the business generates, and businesses with a permanent establishment in India are required to pay up to 40 percent of their profits.
Service Tax: This tax is payable for any services that you may offer, such as delivery charges. If you are running your own webstore, you will be charging service tax of 15 percent (14 percent service charge, 0.5 percent Education Cess and 0.5 percent Krishi Kalyan Cess) on the charges for delivery. If you’re selling your goods on a marketplace (such as all the big e-commerce companies) then this tax will be payable by you to the online marketplace.
For instance, since Amazon provides you its services of picking, packing, warehousing (temporarily) and delivering your merchandise under its ‘Fulfilled by Amazon’ service, here’s what it charges you (read till the end to see service tax charges).
In turn, online aggregators and deals sites that connect customers to service providers are also required to pay service tax.
Sales Tax: This is where things start to get a little complicated because you will have to pay sales tax, but the amount varies across India, from state to state. If you’re selling goods directly through your own store, you’ll have to pay VAT if the delivery is taking place in the same state you’re in, or CST, if the delivery happens outside your state. The rates can go from 1 percent to 20 percent depending on the states, and the merchandise being sold, so you should consult an expert if you’re setting up your own online store.
Selling to a marketplace like Amazon or Flipkart is simpler as you don’t need to know where the end customer is when calculating the tax. The buyer is the online marketplace, so you only need to pay VAT, as long as you’re in the same state. The online platform will collect the VAT from you, and your responsibility ends there. If you’re not in the same state as the online marketplace, CST will apply, but again, you only pay the marketplace so it’s a simpler transaction.
Custom Duty: This is applicable to you only if you deliver your products internationally, and varies depending on many variables such as the country in which you are delivering to your consumer, the product/ merchandise you are selling, its weight etc. The exact fees get complicated so you’ll need to consult an expert with the details of your business to get a clear picture on this one.
Excise Duty: Applicable across the board, to online sellers as well as to brick and mortar establishments, excise is applied on products being sold and varies depending on the items in question. Here’s a list of the applicable duties – you’ll have to pay this no matter whether you’re selling offline, online, from a marketplace, or from your own website.
A few states across India have recently initiated the practice of charging an ‘entry tax’ on goods brought into their state via an online business transaction/ purchase, levied either on the logistics/ courier company making the delivery or the e-commerce marketplace. This ‘entry tax’ is a rather hurried and confused mandate, and has even been stayed by the Courts of some states, such as the case of Uttarakhand where it was unclear as to what the procedure for collection of tax was and even the entity from which such tax was to be extricated. This is in the range of 5 percent to 10 percent, however, it is being challenged by many players in various states where it has been introduced.
From June 01, 2016 onwards, the government has introduced an Equalization Levy, popularly known as the ‘Google Tax’. In the event that you as an online business (webstore or online brand) end up paying to a non-resident (meaning not an Indian company) technology company more than Rs 1 lakh in a year for B2B services or online and digital advertising services, or any such other services (only services, not goods) that use digital advertising space (for instance if you use Facebook or Google for marketing and advertising your products), you are required to withhold a tax of 6 percent from the invoice amount of the non-resident company and deposit the same with the central government. For instance, if your payment to a non-resident technological company ‘X’ for the services stated above amounts to Rs 2 lakh, you will pay to ‘X’ Rs 1,88,000 and deposit 6 percent, that is Rs 12,000 with the Central Government.
The Future – GST?
Governments, be it at the centre or state level, have taken a while to assess and levy taxes on e-commerce transactions. There is, however, the impending GST (Goods and Services Bill) which promises to make applicable to all transactions of goods and services a single and comprehensive tax regime, replacing the more than a dozen different taxes and levies that plaque online (and other) businesses in India. This will bring simplicity, clarity and uniformity to taxation for e-commerce players, as well as a much needed break from the inundating taxation compliances. Right now, there’s not much clarity beyond this, but there is a hope that it will simplify doing business online.
Of course, the information above is not legal or financial advice, and as mentioned earlier, the specific details will anyway vary from business to business. For that reason, it’s important to consult a financial professional for taxation purposes, but this should at least help you to understand what the different things are that you need to know and ask about.
The author of the article is the founder of Purple Stores a SAAS company that helps people to create online stores for their products easily.