E-commerce, or electronic commerce, refers to the buying and selling of goods and services over the Internet and digital platforms. Over the past two decades, e-commerce has witnessed exponential growth, transforming business models, and revolutionising trade and consumer markets globally.
However, the digitalization and dematerialization of commerce have posed several taxation challenges. E-commerce transactions are characterised by mobility, anonymity, round-the-clock service delivery, network effects, and an absence of physical presence. This has made it difficult for tax authorities worldwide to keep pace with the rapid e-commerce expansion from a regulatory perspective.
In particular, two aspects of GST e-commerce taxation have grabbed headlines recently: first, the Goods and Services Tax (GST) application in India to domestic e-commerce operators and transactions. Second, the GST international taxation principles and guidelines are meant for taxing cross-border e-commerce activities.
The blog focuses solely on the business-to-consumer (B2C) segment of the e-commerce industry, excluding business-to-business (B2B) or peer-to-peer transactions (P2P). The scope is restricted to the indirect taxation of e-commerce through GST and associated international tax provisions. Challenges related to income tax have yet to be covered. With this background and delimitations, let us get into the subject analysis.
GST and E-commerce in India
India’s e-commerce or online commerce market has witnessed exponential growth fueled by rising internet users, smartphone adoption, and a young, tech-savvy population.
Categorised as a sunrise industry and a vital enabler of the country’s digital drive, e-commerce presents enormous opportunities. However, certain defining traits of online retail pose taxation challenges. E-commerce firms primarily operate through complex networked structures, with a need for a physical interface between suppliers, sellers, and end-consumers.
There is also a dependence on imported inputs and foreign collaborations. High logistical costs and cash burn rates associated with attractive discounting strategies can encourage tax avoidance by concealing turnover.
| Benefits of GST for E-Commerce Marketplace Sellers | |
| Tax Simplification | GST streamlines e-commerce tax compliance by consolidating multiple taxes. |
| Enhanced Transparency | Digital invoicing under GST ensures transparency, minimising tax evasion risks. |
| Improved Competitiveness | GST removes tax cascading, boosting e-commerce competitiveness for lower prices. |
| Input Tax Credit Benefits | E-commerce sellers benefit from GST by offsetting input tax against sales tax. |
| Boosted Compliance | Mandatory registration and regular filings enhance e-commerce tax compliance. |
| Expanded Market Access | GST allows tax-free interstate sales, promoting market expansion for e-commerce sellers. |
Table: Top benefits of GST for sellers in the e-commerce marketplace
GST levies taxes on the supply of goods and services at consumption points, adhering to the destination principle, with tax accruing to the jurisdiction where the product/service is consumed. GST has specific provisions defining e-commerce operations spanning across e-commerce operators, suppliers of goods and services via online channels, and partner payment settlement platforms.
GST adheres to the destination principle, wherein the location of supply consumption determines the applicable taxes. Certain modifications apply to e-commerce operators. If an e-commerce operator facilitates supply between sellers and consumers located within a state, central GST plus state GST is payable. Inter-state supply transactions will attract integrated GST (IGST).
The e-commerce sector contributes immensely, from boosting entrepreneurship and small business enablement to supporting consumer demand, investments, and job creation. However, particular specificity arises regarding GST implementation:
- Compliance Burden: Multiple registration requirements across states, tedious documentation, and return filing procedures increase the administrative workload for e-tailers without physical operations. Compliant firms lose out to non-compliant players.
- Tax Liability: Tax collection at source and ambiguity regarding product/service classification place additional tax liability on e-commerce operators, diminishing working capital availability.
- Unregulated Sector Advantages: The unorganised e-commerce sector evades taxes, leading to unfair competition. The increased costs post-GST implementation may encourage migration to the informal economy.
Thus, the GST e-commerce taxation structure calls for reforms like simplified registration, a review of TCS provisions, transparent classification principles, ERP-based integration of payment systems, and improved vigilance for better enforcement. The growth potential of online retail has to be unlocked in a structured fashion by making GST compliance easier and more equitable for all players.
GST and International Taxation of E-commerce
While e-commerce allows access to worldwide markets, it also necessitates additional taxation legislation, especially for cross-border transactions. Specific, unique pain points emerge with GST international taxation spanning across:
- Nexus: The level of digital interaction may not determine a clear taxing right or jurisdiction.
- Characterization: Dematerialized purchases blur the lines between goods and services, affecting tax applicability.
- Valuation: Estimating an arm’s length value is complicated for e-commerce, involving data exchanges and no physical change in ownership.
Therefore, the tax must correspond to the substance-over-form paradigm, with value creation as the basis rather than merely physical presence.
Key International Taxation Frameworks
Several countries have carried out unilateral measures to tax inbound cross-border e-commerce transactions. However, the efficacy still needs to be improved in tackling a globally integrated model without multilateral coordination.
Various GST international taxation frameworks and guidelines have emerged consequently to find common ground:
- OECD/G20 Base Erosion Profit Shifting (BEPS) Project: The 15-point Action Plan devised by the OECD aims to combat tax evasion and profit-shifting techniques employed by multinational companies across jurisdictions. While BEPS Action 1 tackles taxation challenges posed by the digital economy, one of its highlights reports addresses mechanisms for imposing equalised levy regimes, especially in cross-border business-to-consumer transactions where non-resident enterprises sell goods and services digitally.
- United Nations Tax Committee: The UN guides intergovernmental cooperation on international tax matters through its handbook for treaty negotiations between developed and developing nations. Its commentary on Article 12B defines a concept similar to the Indian formulation of Significant Economic Presence (SEP), where income accrues to a business exhibiting active and sustained engagement with a country’s economy through digital means.
- European Union (EU): Given the high penetrative influence of non-EU e-commerce operators in its economic bloc, the EU proposed a standard reform programme in 2018 encompassing three unilateral measures: an interim Digital Services Tax (DST) at 3% on revenues of companies with EU digital services revenue above €750 million and EU user base exceeding 10 million; reinforcement of traditional permanent establishment (PE) norms; factor presence PE for calculating profits generated from participating in a jurisdiction’s economy without physical presence.
However, the EU’s DST faced backlash for disproportionately targeting American tech giants. The transatlantic trade rift led to the USA threatening retaliatory tariffs of up to 25% on EU exports.
Global Standards and GST Alignment
Despite variations in unilateral measures worldwide, certain common principles have emerged regarding international GST e-commerce taxation:
- Destination Principle: Taxes accrue to the jurisdiction where consumption occurs rather than the origin location of sellers or providers. Most countries now conform their GST and VAT systems to this tenet.
- Permanent Establishment (PE): Income taxation rights are exercised by nations where businesses maintain a fixed physical operation or economic allegiance through human/capital presence. Expanding the scope to constitute digital PE and virtual permanent establishments remains debatable.
- Arm’s Length Principle (ALP): Cross-border transactions between related entities need pricing at a fair market value similar to unrelated parties. However, e-commerce rarely transfers titles, making ALP applications contentious.
Comparatively, India’s GST law already adheres to these global standards: it follows consumption-based taxation, provides some clarity about marketplace providers through the e-commerce operator construct, and the remaining source-based aspects sync indirect tax elements with the destination principle. However, the peculiarities of digital commerce necessitated additional legislation, as discussed next.
Equalisation Levy and Significant Economic Presence
India introduced the Equalisation Levy 2016, a direct tax aimed at foreign companies providing digital advertising services to Indian firms exceeding Rs. 1 lakh a year and having at least one lakh rupee transactions.
Objectives
- Generating revenue from high-margin ad-based offshore e-commerce activities
- Protecting Indian service providers since non-resident players avoid PE classification,
- Equalising the playing field between domestic and overseas operators
The levy rate is 2% of all payments made to foreign companies. If an overseas entity has a PE in India registered under the Income Tax Act or has availed of tax treaty relief, it is exempt from this levy.
Specific pain points exist about the design and implementation of the equalisation levy:
- Double Taxation: Foreign companies still need to pay income tax where they are residents, apart from this levy in India, although regulations enable them to claim offsets or deductions subject to specific ceiling limits.
- Cascading Effect: Typically, advertising expenses are deducted from gross revenues before computing income tax. However, the equalisation levy applies to service charges before deducting costs. So companies pay taxes on expenses rather than profits, increasing business costs.
- Compliance Hazards: Confusion prevails about eligibility, registration, collection mechanisms, and other procedural aspects. This can undermine revenue productivity through administrative paralysis and pending assessments.
To address these limitations and enable holistic taxation rights over e-commerce transactions from service importers and exporters, India introduced the Significant Economic Presence (SEP) concept through the Finance Act of 2018.
The SEP approach deems a foreign company to have a business connection or taxable presence in India if it conducts sustained digital transactions beyond a revenue- or user-linked threshold through an Indian IP address.
The income attributable to such activities will constitute business profits taxable per Article 7 of applicable Double Tax Avoidance Agreements. Thus, SEP targets e-commerce companies not classified as permanent establishments in India.
However, SEP-based taxation also suffers from a few deficiencies:
- Revenue Uncertainty: Low-profit margin companies may still escape the tax net. Compliance gaps can emerge, akin to the Equalisation Levy.
- Business Cost Escalation: Additional taxes diminish capital availability for reinvesting in local infrastructure innovation pipelines, boosting employment. This may disincentivize market expansion initiatives.
- Risk of Double Taxation: despite bilateral tax treaties, SEP applicability may subject businesses to tax incidence in multiple countries over the same income. The absence of foreign tax credit mechanisms can accentuate the financial burden.
Thus, India needs coordinated reforms across direct and indirect tax components regulating e-commerce to address systemic gaps without undermining sectoral growth prospects.
Conclusion
E-commerce has emerged as an integral pillar of India’s economic growth engine. However, being a differentiated digital business model, e-tail poses complex policy and administrative challenges for taxation frameworks conceptualised for traditional models of trade and commerce.
India has made commendable progress in addressing these issues through GST implementation and measures like the Equalisation Levy and Significant Economic Presence for cross-border transactions. However, the scope remains for further streamlining. Attractive discounting strategies, dependence on imported inputs, and foreign collaborations exacerbate tax avoidance risks that regulatory systems are yet to fully capture.
At the same time, complicating compliance procedures through multi-layered documentation and registration requirements can divert productive capital towards navigating red tape rather than enriching innovation potential. Therefore, the hour needs to balance standardisation with flexibility by simplifying procedures for improved adherence while strengthening the vigilance apparatus to prevent leakage.
Incentives for voluntary compliance, such as tax rebates, dispute resolution procedures, and graduated penalty schemes, may help to build confidence between business and government.
Finally, unilateral actions should be avoided since they often overlook ground realities. In a globally linked and digitised world, structured collaboration with international entities may aid in the formulation of policies that balance revenue targets with sectoral growth imperatives.
FAQs
Who is an e-commerce operator under GST?
As per GST law, an e-commerce operator refers to any entity that owns, operates, or manages a digital platform to facilitate the supply of goods or services between buyers and sellers.
What compliance responsibilities does an e-commerce operator have under GST?
E-commerce operators must collect tax at source (TCS) at 0.5% of the transaction value for all suppliers operating through their platform once turnover exceeds the threshold limit. They need to file monthly TCS returns summarising the tax collected.
What are some critical international taxation principles applicable to e-commerce?
The destination principle (tax accrues where consumption occurs), the concept of the permanent establishment, and arm’s length pricing are fundamental international taxation principles relevant to e-commerce.
What is the Equalisation Levy introduced by India?
It is a 6% direct tax imposed on payments beyond ₹1 lakh a year made by Indian residents or companies to foreign firms providing digital advertising services. The objective is to tax foreign companies lacking permanent establishments in India.
When does a foreign e-commerce company have SEP, or significant economic presence, in India?
SEP provisions deem a foreign enterprise to have a taxable nexus in India if it conducts sustained digital transactions beyond a specific revenue or user threshold emanating from India through an IP address.
Can foreign companies claim relief against double taxation under the Equalisation Levy and SEP?
Yes, foreign companies can claim offsets or deductions subject to prescribed ceiling limits to alleviate double taxation arising from the equalisation levy and SEP, although ambiguity persists over eligibility criteria.
Does India allow foreign tax credits to entities subjected to an Equalisation Levy, or SEP?
Bilateral tax treaties do not explicitly prohibit SEP applicability, although foreign tax credit mechanisms need further streamlining to avoid excessive tax incidence on overseas businesses.
What are some key recommendations for streamlining e-commerce taxation in India?
Simplified GST compliance, ERP-based integration of payment systems, and harmonisation of global rules through multilateral cooperation are some recommendations for rationalising e-commerce taxes.
How can better GST compliance enable India to harness e-commerce growth?
Simplified registration norms and stringent enforcement actions to plug tax leakage, coupled with incentives like tax credits and graded penalty structures, can expand the tax net, allowing India to benefit from the e-commerce boom. It will also encourage voluntary adherence, especially for small firms and startups that release working capital for growth.
How can global tax harmonisation prevent trade disputes over India’s taxation policies?
Unilateral measures like the equalisation levy and SEP risk retaliation through trade sanctions over extraterritorial taxation. Liaising with bodies like the OECD, UN, and emerging economies to evolve consensus-based guidelines can help India align cross-border e-commerce taxation with internationally accepted standards. This can prevent tax disputes and associated economic frictions while safeguarding sector attractiveness.
