A significant number of web sites, such as, Amazon.in, Flipkart.com, Snapdeal.com, eBay.in, etc., are engaged in E-Commerce (E-Com., in short) activities in India. The two major forms of E-Commerce are Business-to-Consumer (B2C) and Business-to-Business (B2B). While most of the companies cater mainly to consumers, the other companies might provide goods and services exclusively to other businesses.
For an E-Com. company, sales takes place primarily in two forms. In the most basic form, these companies offer a platform where the buyer meets the seller on the website. Sellers are merchants who showcase their products on the website of the E-Com. companies. If the product chosen by the buyer and its price meet, a sales transaction is initiated. In such a transaction, the website may only be facilitator and gets a commission for providing the service. The E-Com. company pays service tax on the commission (for service provided) it has collected. There is no question of sales tax or value added tax (VAT) in such a transaction. In the other form, which is more prominent, the E-Com. companies, with the help of data warehousing, data mining and analysis, develops software’s to predict customer preferences and demand-supply mechanism. To save the time, logistic cost and earn a better profit, the E-Com. companies store goods on behalf of the suppliers which they feel are fast moving.
With the increase in e-commerce transactions, the E-Com. Companies as well as the Government, within the ambit of the existing revenue laws, are finding it difficult to meet the requirements of newer kind of challenges. This paper is an exercise to initiate discussion in respect of existing VAT/CST laws vis-à-vis e-commerce activities.
I) Legal VAT/CST Provisions relating to E-Commerce Companies:-
Before proceeding further, let us go through the various VAT/CST provisions briefly in this regard: -
(a) It is the dealer, who is liable to pay tax on sale of goods in the appropriate State.
(b) As per Explanation 1 of section 2(b) of the CST Act, -
“Every person who acts as an agent, in any State, of a dealer residing outside that State and buys, sells, supplies, or distributes, goods in the State or acts on behalf of such dealer as-
(i) a mercantile agent as defined in the Sale of Goods Act, 1930 (3 of 1930), or
(ii) an agent for handling of goods or documents of the title relating to goods, or
(iii) an agent for the collection or the payment of the sale price of goods or as a guarantor for such collection or payment,
and every local branch or office in a State of a firm registered outside that State or a company or other body corporate, the principal office or headquarters whereof is outside that State, shall be deemed to be a dealer for the purposes of this Act.”
Since the E-Com. companies are collecting payment of the sale price of goods (in addition to handling of goods, as the case may be), they would be deemed to be dealer for the sales tax purposes.
(c) Levy of VAT is a State matter. Situs of sale, generally, depends in a State from where movement of goods commences. If goods move in the pursuance to customer’s order, and if the movement of goods terminates in some other State, it will be inter-State sale; and if the movement terminates in that State itself, it will be considered as local (intra-State) sale.
(d) Tax shall be collected and paid only in the appropriate State. By paying the same, or even higher, amount of tax in some other State and pleading that the dealer has not been benefited and that there is no loss to Indian (Union + States) Government(s), the dealer cannot be absolved from its liability to pay tax in the appropriate State.
(e) The principal as well as agent will inform to their respective appropriate authorities about their agreement and warehousing of goods.
(f) If goods are moving by the seller to E-Com. company to some other State otherwise than in pursuance of sale agreement, or by the seller himself to its outside the State branch, then that movement shall be supported on the strength of Form F.
(g) Procedure for levy of VAT on transfer of goods to the consignment/mercantile agent is materially different from that of on the clearing & forwarding (C&F) agent; whereas the former pays VAT/CST under his own TIN (registration), the latter pays tax under the TIN of the principal. In the case of C&F agent, since the sale is affected in the name of the principal, registration under the State VAT Act is obtained in the name of the principal.
II) Models of Operations of E-Commerce Companies:-
In the light of afore-stated provisions, let us discuss the VAT/CST liability and obligations of E-Com. companies and the Suppliers in various models, as under: -
(A) Model- 1:
In this model, E-Com. companies are owner of the goods and sell goods as their own goods after receiving of booking/order on its e-portal; and, generally, own and store goods even before receiving of customer’s order. Here, E-Com. company is liable to pay sales tax in the same manner as any other dealer. The sale shall be taxable at a consideration payable by the customer to the E-Com. company, who shall, however, be eligible to purchase goods on the strength of Form C and, as the case may be, to claim input tax credit under the State VAT Act.
However, due to FDI restrictions in the retail sector, it is not possible for multi-national companies to adopt this model. Moreover, this model requires huge investment in goods.
(B) Model- 2:
Under this model, after receiving of online order, the E-Com. company informs the seller about such order. The seller, thereafter, makes first sale of goods to the E-Com. Company, who, in turn, raises invoice on the customer. Payment from the customer is received by the E-Com. company, who after retaining its profit margin, remits the purchase price to the seller.
In this case, even though goods are supplied to the customer by the supplier, yet, invoice on the customer is raised by the E-com. company. Since transfer of the ownership by the supplier to the E-Com. company and then to the customer synchronizes, transaction would consist of two sales, viz, (i) From the supplier to the E-Com. company; and (ii) From the E-Com. company to the customer. In such cases, taxability shall be decided accordingly as per VAT/CST provisions.
(C) Model- 3:
The E-Com. company acts as a facilitator/booking agent between the sellers and the buyers, and in no way controls the goods. Once, the buyer makes order online, the E-Com. company informs the seller about such order. The supplier, thereafter, using its own logistics, supplies the goods to the customer and raises the invoice. If the payment is received by the E-Com. company, it, after retaining its commission, remits the balance amount to the seller. On the other hand, if payment is received by the supplier (cash on delivery), it remits the amount of commission to the E-Com. company.
In this model, even though E-Com. company handles the proceeds, but, in true sense, will be considered merely as booking agent; and will not be liable to pay VAT. Here, goods remain in the custody of the supplier, who delivers the goods and raises invoice on the customer as his own goods. State VAT/CST shall be imposed on the amount of invoice raised by the supplier on the customers. Further, invoice shall be raised by the supplier in the State where goods are located, i.e., the seller will collect State VAT/CST in the State from where movement of goods commences.
(D) Model- 4:
Under the fourth model, the supplier stores its products in one of the warehouses provided by E-Com. company with a view to reduce the delivery time and quality assurance. Goods to the customers are dispatched by the E-Com. Company; however, invoice is raised in the name of supplier. Payment is also received by the E-Com. company, who after retaining its commission, remits the remaining amount to the supplier. Warehouse of the E-Com. company is shown as additional place of business of the supplier.
In this model, though the invoice is raised in the name of the supplier yet the E-Com. company handles the goods as well as proceeds; thus, prima facie, E-Com. company will be considered as C&F Agent of the supplier. Accordingly, the supplier will be liable to obtain VAT-TIN in that State and pay VAT/CST as per the provisions of such State VAT Act. If the goods are transferred by the supplier from some other State to the warehouse of the E-Com. company, such transfer will take place on the strength of Form F.
III) Situs of the sale of Intangible Goods – An unresolved issue
It is comparatively simpler to determine situs in respect of tangible goods. However, it is a difficult task to determine the situs of sale of intangible goods, such as patents, copyrights, software, etc. Just assume, software (anti-virus) is developed collectively by three offices of ABC Company, that is, Karnataka, Haryana and USA. This software is traded (download) through internet after making payment by credit card or otherwise. So far as the customer is concerned, generally, it is not difficult to decide the place of download. The position for determining the situs becomes difficult as far as the seller is concerned. Can we decide; which of the offices of ABC Company owns the ownership in this software, where this software is lying and from where the ownership therein is transferred? Unless these questions are answered, the main issue for determining the appropriate State eligible to levy VAT on the sale transaction cannot be resolved. Another issue, which many a times becomes very significant is that, whether there is any stock (software) transfer from one State to another, and if yes, how?
IV) Other Issues
(i) Indicating the amount of tax on the invoice – Mandatory under the Delhi VAT Act
As per section 50(2)(e) of the Delhi VAT Act, the tax invoice shall contain the description, quantity, volume and value of goods sold and services provided and the amount of tax charged thereon indicated separately. Likewise, section 50(5)(e) of the Delhi VAT Act provides that the retail invoice shall contain the description, quantity, volume and value of goods sold and services provided and the amount of tax charged thereon indicated separately. Similar provisions might exist in other State VAT Acts as well.
(ii) Combo Offers (Goods + Goods) or (Goods + Service)
In many cases, E-Com. Companies offer number of marketing schemes, such as, -
(a) Two or more products are supplied at a composite price: For example, one footwear (taxable @5%) and one sun-glass (taxable @12.5%) at a composite price of, say, Rs.1,000/-. In these cases, it is not only mandatory to specify the amount of tax on the invoice itself, but it is essential also for the purpose of determining the amount of VAT payable on such composite transaction. Otherwise, the entire consideration might be taxed by the VAT Authorities at the higher rate of tax.
(b) Supply of free goods along with supply of main article: For example, supply of USB pen drive while purchasing a Laptop computer, that is, the main commodity plus child commodity. In these cases, unless the facts suggest otherwise, dominant intention is to sell the main commodity; and therefore, full value of consideration shall be taxable at the rate applicable on the main product under the VAT Act. Further, since the supply of free goods is an integral part of performance of main contract, the dealer shall be eligible for input tax credit on local purchase of both these products, subject to other provisions of the VAT Act.
(c) Supply of free service along with supply of main article: For example, supply of one spa/travel free while purchasing a Laptop computer. In these cases, unless the facts suggest otherwise, dominant intention is to sell the main product; and therefore, full value of consideration shall be subject to VAT.
(d) Supply of free goods along with supply of services: For example, supply of USB pen drive while booking an air ticket. In these cases, unless the facts suggest otherwise, dominant intention is to provide service. However, since goods are supplied free of cost, the dealer shall not be eligible for input tax credit on purchase of these goods (pen dive in the present case).
Looking at the intricacies involved in the taxation of sale of goods under various models of e-commerce, it is necessary that a committee be set up by the Indian Government to look into the various issues relating thereto. For the time being, E-commerce companies must be not only be careful in selecting their model of business, but also keep pressure on the Government to lay down the law which not only bring simplicity and transparency, but also avoid possible litigation.
FCA (Author & Consultant)