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How is VAT calculated for ecommerce in India?
A significant number of websites such as Amazon, Flipkart, Snapdeal,thegiftipedia.com etc are engaged in E-commerce(E-com.,in short) activities in India.The two major forms of E-commerce are Buisness-to-Customer(B2C) and Business to Buissness(B2C). While most of the 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 softwares 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–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 customers 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 customers 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.
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