Home digital tax Taxation of online marketplaces : all you need to know

Taxation of online marketplaces : all you need to know

April 11, 2024

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This article has been written by Dimple Kheradiya pursuing a Diploma in US Corporate Law for Company Secretaries and Chartered Accountants course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Millions of people have made purchase and sale transactions through Amazon, Flipkart, Alibaba, eBay, poshmark and other marketplaces. These platforms are collectively referred to as online marketplaces, in which goods, services or both, including digital products, are supplied through a digital or electronic network. In different countries, these online platforms are referred to by different names like Electronic marketplaces, Marketplace operators, Marketplace facilitators, Interfaces, Electronic distribution platforms, etc. In India, it is simply called e-commerce, i.e., e-commerce.

In India, due to the adoption of rapid digital technology and access to the internet through broadband, 4G, 5G, etc., there has been a tremendous increase in e-commerce.India has become the second-largest market for e-commerce operators.

What is e-commerce

It works with different models but the most basic factors of all the models are e-commerce operators and e-commerce participants. The buyer visits online marketplace operators, places the order and, with the help of e-commerce participants, the operator delivers goods to the buyer.

Section 2(45) of the CGST Act of India defines an e-commerce operator as any person who owns, operates or manages a digital or electronic facility or platform for e-commerce. E-commerce participants are those entities that either sell goods, provide services or both through e-commerce operators. Let us understand the same with an example.

Example: Suppose a buyer ABC wants to purchase a mobile phone online. He visits Amazon (e-commerce operator) and orders a phone at Amazon. Now Amazon is forwarding that order to e-commerce participant XYZ attached to him for delivery of the mobile phone. XYZ issued an invoice to ABC and delivered a mobile phone to ABC. In turn, ABC made a payment to the e-commerce operator, which was reimbursed to the participant after deducting the e-commerce operator commission and applicable tax on it. In this way, the whole procedure works.

Key challenges in taxation of online marketplaces

The taxation of online marketplaces presents several unique challenges.

Borderless e-commerce: Traditional taxation rules are based on physical presence. However, online marketplaces operate across borders, making it difficult to determine the location of the taxable transaction.
Complexity of transactions: Online marketplaces often involve multiple parties, including the platform, sellers, and buyers. This complexity makes it challenging to identify who is responsible for tax collection and remittance.
Rapidly evolving business models: Online marketplaces are constantly evolving, with new business models emerging frequently. Tax authorities must adapt quickly to keep up with these changes to ensure fair and efficient taxation.
Data collection and sharing: Online marketplaces possess vast amounts of data about transactions, sellers, and buyers. Tax authorities need access to this data to effectively administer and enforce tax laws. However, concerns about privacy and data protection must also be considered.
International tax treaties: International tax treaties play a crucial role in determining how cross-border e-commerce transactions are taxed. Interpreting and applying these treaties in the context of online marketplaces can be challenging.
Tax avoidance and evasion: The anonymity and ease of cross-border transactions in online marketplaces can facilitate tax avoidance and evasion. Tax authorities must develop strategies to combat these practices.
Administrative burdens: Tax compliance for online marketplaces can be administratively burdensome, especially for small and medium-sized enterprises (SMEs). Simplifying tax rules and procedures is essential to reducing this burden.
Consumer protection: Consumers shopping on online marketplaces must be adequately informed about their tax obligations. Ensuring transparency and clarity in tax matters is crucial for consumer protection.
Policy coordination: Effectively taxing online marketplaces requires coordination among tax authorities at the national and international levels. Developing harmonised tax policies and regulations is essential to addressing the challenges of cross-border e-commerce.
Emerging technologies: New technologies, such as blockchain and cryptocurrencies, are disrupting traditional business models and payment systems. Tax authorities need to understand and adapt to these technological advancements in order to effectively tax online marketplaces.

Addressing these challenges requires a collaborative effort involving governments, tax authorities, businesses, and international organisations. Striking the right balance between revenue generation, fairness, and administrative simplicity is crucial to ensuring a sustainable and equitable taxation system for online marketplaces.

Imposition of tax on online marketplaces

Online e-commerce is transforming the principles of retail trade and is growing at a tremendous pace. In early 1998, putting a tax on the Internet and e-commerce was a very serious and debatable matter in the United States. Almost all of the users are Americans and the government was afraid of any adverse consequences of applying tax to the well growing leading Internet economy and online marketplace growth. The University of Texas conducts research on it and submits that this Internet economy has four layers producing large amounts of revenue. A range of $56 billion to $115 billion and created from 2,30,000 to 4,82,000 jobs in 1998.

Taxation is a form of regulation. Whenever any new source of income or wealth is generated, the government moves to tax it. As President Reagan said, “the government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.”

As online marketplaces had revolutionary growth all over the world, to avoid revenue loss to the government, almost every country decided to charge tax on them. Some started in the early stages, and some charged later on. Let’s have a brief idea about the taxation of online marketplaces in different countries.

Taxation of online marketplaces in India

Earlier, there was no tax on online marketplaces called e-commerce businesses in India but to prevent loss of revenue, the Government of India has introduced provisions under the Income Tax Act and the Goods and Services Tax Act. The brief discussion of the same is as under.

Under Income Tax Act

Section 194

Section 194 has been introduced in the Finance Act, 2020 which amended the provision of the Income Tax Act, which states that TDS @1% should be deducted (note: TDS will not be applied to the GST component) by the e-commerce operator of the e-commerce participant on the gross amount of sales or services or both credited to the e-commerce participant account or made payment, whichever is earlier. Here, the gross amount of sales or services should be considered. For example: Goods sold of Rs. 20 lakhs out of which 2 lakhs of goods have returned, then also TDS to be deducted on 20 lakhs and not on 18 lakhs. Conditions must be taken care of while deducting TDS:

E-commerce participants must be residents of India .
If previous gross sales, services or both of e-commerce participants exceed INR 5 lakh rupees, then only TDS can be deducted. This threshold is not applicable to online hosting of advertisement services.
E-commerce operators must collect PAN or AADHAR of e-commerce participants, in the absence of which 5 % TDS is required to be deducted under Section 206AA.

Section 165

The Equalisation Levy introduced by the Finance Act 2016 states that if a resident of India doing business or profession in India or a non resident Indian having a permanent establishment in India pays for commercial online /digital advertising of an amount exceeding 1 lakh rupees to a non resident person not having a permanent establishment in India, then he has to pay an equalisation levy tax of 6% of the consideration of online advertising.

Section 165A

The Equalisation Levy was introduced by the Finance Act 2020, which states that an e-commerce operator should pay an equilization levy of 2% of the consideration received if the amount exceeds 2 crores per year from the sale of goods or services by the e-commerce operator when the amount is received by a person resident in India or a resident in specified circumstances or from the sale of data collected from a person resident in India or using an IP address located in India.

Under GST Act

In India, Section 2(44) of the CGST Act, 2017 defines e-commerce as “the supply of goods or services or both, including digital products, over a digital or electronic network.”

Any person who supplies goods, services or both to e-commerce operators has to register under GST. However, some services specified under notification no. 65/2017 allowed to take advantage of the threshold limit. Additionally, through recent notification, suppliers who supply goods only within the same state of registration are no longer required to register.

Supplier on sale of goods liable for GST Registration and liability of GST are subject to all the conditions except those mentioned in Sections 9(5) of the CGST Act, 2017 and 5(5) of the IGST Act, 2017, where e-commerce operators are required to pay GST on a reverse charge basis.

Section 9(5)

Services are specified with conditions under which the e-commerce operator has to pay GST on a reverse CHarge basis. They are:

Hotel aggregators like Oyo, Make My Trip, etc. are e-commerce operators that are liable for GST registration and payment of tax if the hotel owner is not liable to take registration under GST.
Cab !)aggregators like Ola, Uber, etc. are compulsorily liable for GST payments on reverse charge basis.
Housekeeping service aggregators like Urbanclao, Housejoy, etc. and e-commerce operators have liability for GST if the service provider is not registered under GST.
E-commerce operators are liable for GST on the commission value earned by e-commerce operators for providing the e-commerce platform.

Section 52

Every e-commerce operator shall collect one percent tax collected at the source (TCS) of the net value of taxable supplies (0.5% of CGST and SGST each and 1% in the case of IGST) made through it by suppliers (e-commerce participants) where the consideration with respect to such supplies is to be collected by the operator.

As per the explanation, “net value of taxable supplies” shall mean that the taxable supplies returned to the suppliers shall be reduced from the gross value of taxable supplies.

TCS was not collected by e-commerce operator in the following cases:

Sell of exempted goods
If GST is payable on reverse charge basis by e-commerce operator.
Import of goods or services.
If a supplier sells their product through their own platform.

Taxation in Australia

Online marketplaces in Australia are called Electronic Distribution Platforms, and 10% GST is levied on the consideration received by e-commerce entities. Non resident sellers should take GST registration if annual revenue exceeds AU$75000 per annum.

Taxation in Canada

In Canada, an online marketplace is referred to as a distribution platform operator. If the vendor is registered, then he is liable to charge and collect the tax GST in the non participating province and HST for online transactions in the participating province. If the vendor is not registered, then e-commerce operator is liable to charge and collect GST/HST.

Taxation in European Union

In the European Union, online marketplaces are referred to as electronic interfaces, and VAT is levied on the transaction. In the European Union, member states can put in place their own rules in addition to the above guidelines so individual countries’ rules should be checked while using online platforms for taxation matters.

Taxation in Indonesia

The online marketplace here is referred to as an entity that provides the electronic communication service that allows overseas merchants to make sales of digital products to Indonesian customers. Here, VAT is charged and remitted on sale to Indonesian customers.

Taxation in New Zealand

GST Will be levied by online operator if-

Operator registered under GST, or
required to register under GST, or
sale of Low VAlue goods by non resident, or
goods are delivered either by operator or vendor,

If none of these conditions are satisfied, then the vendor is considered a supplier and responsible for GST registration.

If, in a 12 month period, the turnover of the market exceeds NZ $60,000, the platform needs to undergo GST registration.

Taxation in Thailand

Online marketplaces are called electronic platforms in Thailand and are liable for VAT tax. If in one calendar year sales exceed 1.8 million baht, the platform is liable for VAT registration and charging tax on behalf of vendors.

Taxation in United Kingdom

Online marketplace transactions VAT tax is charged in the UK, except in Northern Ireland. If the goods are located outside the UK and the online marketplace facilitates import sales under $135, it is responsible for charging VAT; otherwise, the vendor is responsible.

If the goods are already located in the UK, then the online marketplace is responsible for charging VAT tax.

Taxation in United States

All states in the United States have marketplace facilitator rules and tax laws where the facilitator is considered a retailer and seller for all sales facilitated through its marketplace. Each state has its own sales threshold and as soon as the marketplace reaches that threshold in a particular state, it must register for a sales tax permit in that state.

In general, sales tax takes a percentage of the price of goods sold; a state might have a 5% sales tax,a country 1%, and a city 1.5%, so residents of a city pay 7.5% in total.

Conclusion

Trading through online marketplaces is tremendously increasing nowadays, globally. Tax laws for trading at online marketplaces are different in different countries. One must be aware of the tax compliance of the country while making transactions on online platforms, as it is a well known phrase that “ignorance of the law is no excuse.”