Tax implications of Merchant of Record services for 44ADA, 44AD and GST?

A detailed question about tax implications for digital product sales through "Merchant of Record" platforms! Tax Implications: - *44ADA and 44AD*: The income tax department recognizes income from digital product sales under Section 44ADA (for professionals) and Section 44AD (for businesses). - *GST*: If your annual turnover exceeds ₹20 lakhs, you'll need to register for GST. The Merchant of Record platform may handle GST compliance, but you'll still need to report the income in your tax return. - *Foreign Income*: If you receive payments from foreign customers through the Merchant of Record platform, you'll need to report this income under the "Foreign Sources of Income" section in your tax return. Recognition of Merchant of Record Platforms: - *Income Tax Department*: The income tax department may recognize income from Merchant of Record platforms, but you'll still need to maintain proper documentation and report the income accurately. - *GST Compliance*: The Merchant of Record platform may handle GST compliance, but you'll still need to ensure accurate reporting of GST in your tax return. Refunds and Tax Implications: - *Refund Processing*: If you offer refunds via the Merchant of Record platform, you'll need to declare only the amounts you received minus the refund amount in your tax return. - *Tax Responsibility*: The Merchant of Record platform will handle tax compliance for refunds, but you'll still need to report the income accurately in your tax return. Advertisement Revenue under 44AD: - *Advertisement Revenue*: Advertisement revenue will be taxed under Section 44AD, and you'll need to report this income accurately in your tax return. - *Tax Responsibility*: The Merchant of Record platform may handle tax compliance for advertisement revenue, but you'll still need to report the income accurately in your tax return. Key Considerations: - *Documentation*: Maintain proper documentation, including invoices, payment receipts, and tax returns. - *Tax Compliance*: Ensure accurate tax compliance, including reporting income from digital product sales, foreign income, and advertisement revenue. - *Professional Advice*: Consult a tax professional or chartered accountant to ensure accurate tax compliance and to address any specific tax-related queries. Recommendation: 1. *Consult a Tax Professional*: Engage a tax professional or chartered accountant to ensure accurate tax compliance. 2. *Maintain Proper Documentation*: Keep accurate records of invoices, payment receipts, and tax returns. 3. *Report Income Accurately*: Report income from digital product sales, foreign income, and advertisement revenue accurately in your tax return.

Dear Rama chary Rachakonda. Your reply looks like it has been generated by ChatGPT or a similar chatbot. I already asked my queries to a chatbot before posting here. If it is from a chatbot, I hope you at least verified the information before posting it here? Because such chatbots can give false information too. There was a time that ChatGPT confidently told me that I'm using the wrong engine oil for my bike because it has a dry clutch. But when I checked with the mechanic, he said it has a wet clutch and the engine oil used is correct. I cross-verified it, and the mechanic was right. There are other such errors I've seen such chatbots generate.

So if anyone on this forum could please provide an answer based on their actual knowledge of Merchant of Record, please do. Alternatively, please point me to where the relevant laws are mentioned, and I'll read it. I already saw the income tax law for 44ADA, and such details are not mentioned there. That's why I decided to ask here.

Hi Navin,

haver same question,

have you found the answers for your questions ?

In merchant of record they say they take care of tax compliances, then that means we dont have to report gst ?

and for digital products business such as design templates, will they come under 44ad ?

I asked an Indian MoR (Merchant of Record) platform and a foreign MoR platform some questions and these are the question summaries and the response I received from them (in each the first answer is from the Indian platform and the second is from the foreign platform). Hope it helps:

• Q1: I understand that MoR takes care of tax compliances, but how do I report the income in my ITR? If a person in some other country has purchased my software via the MoR, do I still need to declare that amount under 44ADA and re-declare it under foreign sources of income in my ITR or is that not necessary if the MoR is based in India?

A1: As MoR we take care of Sales Tax. 44ADA is pertinent to income tax. We remit the final amount to your bank account. The amount we remit to your account is your income and you manage income tax on it.

A1: Questions about reporting income in your ITR, declaring foreign sources, or reporting TIN/passport numbers for your income tax are specific to your individual tax residency and business structure. These require advice from an Indian tax professional.

• Q2:  As a freelancer or a small business am I supposed to fill in tax forms like W-8 BEN for USA (or similar forms for multiple countries) even though you act as the MoR?

A2: We need the W8 form for non-US citizens. It is a requirement similar to TDS.

A2: [I didn't ask this question to the foreign MoR]

• Q3: As MoR, you would have to comply with various GST rules. As a freelancer I do not have to unless my income exceeds a certain amount. What amounts of money are deducted from the payments I receive, which you have to pay as GST or other taxes? How would I recover that money if I register for GST and how do tax declarations and my user settings/registration with your platform vary during transition phases where I newly register for GST and/or start requiring to also receive income under 44AD in addition to 44ADA? How do things change if after a few months or years I register myself as a One Person Company or LLP or sole proprietorship or if I decide to make the business a private limited company, etc.

A3: We collect sales tax as per customer location. The payout to you does not require GST.

A3: We collect GST from your Indian customers and remit it. You are generally not required to remit these sales taxes directly. Details on GST deductions, recovering input tax credits, or changes during GST transitions/entity changes are tax-specific and require professional advice.

• Q4: If I have to offer refunds to a customer via the MoR close to the end of the financial year, would I have to declare in my income tax form, only the total amount I received minus the refund? What if the amount received was on March 29th and the refund was done on April 2nd? Would these be details I'd have to worry about or would it all be handled automatically by the MoR? Or do you provide a statement containing all the details I need to declare in my income tax form, and it's just a matter of me typing those numbers into the right places in the income tax form? (if a statement is provided, it would help to mention in the statement, which sections of the income tax form it could be entered into, or a better way would be for you to provide such information directly to the income tax department and it would automatically be available in the AIS form).

A4: That is not relevant. Your income is the billed invoice that we pay out to you every settlement.

A4: We provide Payout Invoices (Reverse Invoices) and Exported Orders (CSV) for your records. How these are declared in your ITR is a question for your tax professional. We do not provide specific ITR section guidance or direct data to income tax departments.

• Q5: From the perspective of 44ADA and 44AD, how does our income tax department recognize MoR payments? Which specific income tax laws/sections mention details about MoR?

A5: Apple Appstore & Google Playstore are MoRs. There is no legal challenge.

A5: Income Tax Department Recognition of MoR Payments (44ADA/44AD): How the Indian tax department recognizes MoR payments for your income declaration is a complex question best addressed by a tax professional with expertise in this area.

@ tuff: Based on these questions you could ask ChatGPT or Grok more questions by copy pasting the text above. I think digital design templates could come under 44ADA and 44AD. I'm not a finance person, so it'd be better to ask a tax professional. You can ask your initial questions to ChatGPT or Grok and see first, so that you'll be in a better position to ask questions to the tax professional. You could also directly contact MoR platforms (and it'd be nice if you share their response here so that it'd help others).