E-commerce has transformed the way of doing business. Today, retailers almost universally recognise that digital has reshaped customer behavior and shopping forever. The same is true for India. The e-commerce market in India has grown from $4.4 billion in 2010 to around $16 billion in 2015. It is further expected to hit $76 billion by 2021.
The pace of technology change in this sector is very fast and individuals, businesses and governments need to be in sync with it. The business model changes have become more frequent, delivery more complex and innovation every day affair. The future technologies enabling e-businesses will be revolutionary.
As the e-commerce space is getting dynamic and evolving rapidly with several new models like Analytics, Payment gateways, Social media, 3D printing etc. several challenges have surfaced in the area of taxation. Considering the same, there are various expectations of the industry from the government in Budget 2017. Some of the direct tax issues faced are summarised below.
Characterisation of income
The characterisation of income is a key issue faced by e-commerce industry both by residents and non-resident players. The income can be characterised as business income, royalty or fees for technical services. The taxability and withholding tax provisions for each differ, more particularly for payments like use or sale of goods (such as software, videos, electronic database), payment for use of equipment, website hosting, cloud computing etc.
Even in the case of a resident player, if tax is withheld especially as definition of royalty is very wide, they can face administrative and cash flow issue (if they are incurring losses or the profit margins are small). It can also provide significant uncertainty of doing business in India for non-resident player.
There should be appropriate amendments in the budget to provide clarity on the characterisation of income and consequent tax treatment for such payments to put at rest significant litigation.
Restriction on carry forward and set-off of losses
As per the existing provisions of the Income tax Act (‘the Act’) , business loss can be carried forward and set off for a period of 8 years. The same is subject to continuity of 51 percent of the voting power being held by the same shareholders .
Given the capital intensive nature of the e-commerce industry and high gestation period, the time limit of 8 years may not be sufficient. Further, while the technology based start-ups and other companies can raise capital, based on the provisions of the Act as it stands today, even if there is no change in the control and management of the company, the losses carried forward can be restricted if there is change in shareholding beyond 49 percent.
There is a need to amend the provision to state that if the change in shareholding is merely due to infusion of funding by the investor without change in the control and management of the company, then the rigour of restrictive clause for carry forward and set off of loss under section 79 of the Act should not be applicable. It is further recommended that considering the gestation period of the industry particularly due to investment in technology and advertisement cost, the carry forward of business loss be extended from 8 to 12 years for e-commerce sector.
Further, as the market will become more mature, there would be significant consolidations through merger, acquisitions and internal re-structuring. As large number of e-commerce companies make substantial losses in their initial stages, the scope of provisions of section 72A of the Act dealing with carry forward of accumulated losses and unabsorbed depreciation in amalgamation, de-merger etc. be also extended to the e-commerce sector.
Withholding tax on commission. Considering the difficulty faced by sellers of goods and services in withholding tax on commission from e-commerce service provider, the said commission be exempted from the provisions of the withholding tax.
As e-commerce industry invest heavily in technology, the weighted deduction of 150 percent under section 35(2AB) be also extended to research and development in e-commerce industry.
There are various issues faced by the industry in the indirect tax as well including entry tax, collection of tax as agents etc. Hopefully, GST may resolve some of them.
As the e-commerce industry is growing significantly with increase in the internet penetration and smartphone usage, simplifying of tax rules for this sector would go long way in boosting the e-commerce sector.
(The writers are Partner with Deloitte Haskins & Sells LLP)
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Updated Date: Jan 19, 2017 10:54 AM