E-COMMERCE AND TAXATION IN INDIA

(Project Report)

SUBMITTED TO:

Dr. Archana Shyam Gharote

(Faculty Member, Principles of Taxation)

SUBMITTED BY:
Moulik Shrivastava
B.A.LL.B (Hons.)
Semester-V, Section C
Roll Number 86

Hidayatullah National Law University

Uparwara Post, Abhanpur, Atal Nagar – 493661 (C.G.)

 2

DECLARATION

I, Moulik Shrivastava, hereby assert that this project is my own, hence original. The
information submitted herein is true and original to the best of my knowledge. Also, the
sources of the material used in this project report have been duly mentioned and
acknowledged.

Name: Moulik Shrivastava

Semester: V

Section: C

Roll Number: 86
 3

CERTIFICATE

This is to certify that Mr. Moulik Shrivastava, a student of Hidayatullah National Law
University, has successfully completed the project work entitled “E-Commerce abd
Taxation in India” as a part of the coursework requirement for the B. A. LL. B. (Hons.)
program at the Hidayatullah National Law University. It is an authentic work carried out by
her under my supervision and guidance.

To the best of my knowledge, the project has not been submitted to any other
University / Institute for the award of any degree.

Date: 03/09/2019

Moulik Shrivastava

Place: Hidayatullah National Law University, Atal Nagar

Dr. Kaumudhi Challa

Assistant Professor, Hidayatullah National Law University

 4

ACKNOWLEDGEMENTS

I, Moulik Shrivastava, would like to humbly present this project to Dr. Archana Shyam
Gharote would first of all like to express my most sincere gratitude to Dr. Archana Shyam
Gharote for his encouragement and guidance regarding several aspects of this project. I am
thankful for being given the opportunity of doing a project on “E-Commerce and Taxation in
India.”

I am thankful to the library staff as well as the IT lab staff for all the conveniences they have
provided me with, which have played a major role in the completion of this paper.

I would like to thank God for keeping me in good health and senses to complete
this project. Last but definitely not the least; I am thankful to my seniors for all
their support, tips and valuable advice whenever needed. I present this project with
a humble heart.

Name: Moulik Shrivastava

Semester: V

Section: C

Roll Number: 86
 5

CONTENTS

DECLARATION.............................................................................................................................................................................. I

CERTIFICATE................................................................................................................................................................................ II

ACKNOWLEDGMENTS............................................................................................................................................................. III

1. INTRODUCTION.............................................................................................................................................................. 1

1.1 Concept of Historical School and Modern Jurisprudence.....................................................................................................1

1.2 Research Methodology......................................................................................................................................................... 2

1.2.1 Research Problem......................................................................................................................................................... 2

1.2.2 Rationale....................................................................................................................................................................... 2

1.2.3 Objectives..................................................................................................................................................................... 2

1.2.4 Hypothesis....................................................................................................................................................................2

1.2.5 Review of Literature.....................................................................................................................................................2

1.2.6 Nature of Study............................................................................................................................................................. 4

1.2.7 Sources of Study........................................................................................................................................................... 4

1.2.8 Limitation of the Study...............................................................................................................................................4

1.2.9 Chapterisation............................................................................................................................................................. 4

2. E-TAXATION IN INDIA....................................................................................................................................................5

2.1 Uniqueness of E-Commerce Taxation..........................................................................................................................5

2.2 Issues Emerging from Online Transactions..........................................................................................................................6

2.3 The Basis of Taxation in Online Environment......................................................................................................................7

2.4 Constituting Permanent Establishment.................................................................................................................................7

3. ‘ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT’ MODEL TREATY...........................9

3.1 Whether a website acts as a permanent establishment..........................................................................................................9

3.2 Whether a server acts as a permanent establishment...........................................................................................................10

3.3 If an enterprise hosting its own website..............................................................................................................................10

3.4 Taxation practice in India...................................................................................................................................................10

3.5 Issue of residence............................................................................................................................................................... 10

3.5.1 When person is a resident in India.............................................................................................................................10

3.5.2 When company is a resident in India.........................................................................................................................11

3.6 Establishing Business Connections.....................................................................................................................................11

 6

4. LEGISLATIONS AND ACTS IN INDIA..................................................................................................................................13

4.1 Business Connections and the Finance Act, 2003...............................................................................................................13

4.1.1 Establishing Permanent Establishment......................................................................................................................13

4.2 Establishing Permanent Establishment and the Finance Act, 2003.....................................................................................13

4.3 BOPs as Permanent establishment......................................................................................................................................13

5. TAXING DIGITAL GOODS..................................................................................................................................................... 15

5.1 Tax on sale or purchase of goods.........................................................................................................................................16

5.2 Situs of sale or purchase...................................................................................................................................................... 16

5.3 Taxing digital (intangiable) goods in India...........................................................................................................................16

6. GST AND IMPACT ON E-COMMERCE TAXATION............................................................................................................18

6.1 Mandatory GST registration for Online Sellers............................................................................................................18

6.2 More opportunities for interstate sellers.......................................................................................................................18

6.3 Direct sellers vs. e-commerce marketplaces.................................................................................................................19

CONCLUSION............................................................................................................................................................................. 20

BIBLIOGRAPHY AND REFERENCES .....................................................................................................................................21

 1. INTRODUCTION
1.1 Concept of E-Commerce Taxation

E-commerce occurs in various forms and between various entities in the market. One
among the queries faced by several nations is how to tax it. As the internet crosses the
boundaries the main challenges are to qualify the engagement of basic requirements
of physical presence and substantial nexus criteria of taxation. The project report tries
to analyse the key issue in the area of e-commerce taxation. The same also alarms the
nation that if it is left untaxed it will give rise to a failing economy, which indeed is at
failing proximities.

Every industry contributes to the nation’s growth, the communications industry has become
very significant and is promising to grow enormously in the near future. Unlike other
communication media, internet is facilitating access to knowledge bank, in competitive
market and rendering services of world class standards and joining ends of ability to access
the areas remote to human’s physical presence. E-commerce offers a new way of conducting,
managing and executing business transactions using modern information technology. It has
redesigned the traditional mode of business. As a whole, it is a business practice that involves
use of computers, computer systems or computer networks1.

The project report aims at accessing, analysing and studying the ambiguous and grey area of
e-commerce and taxation on e-commerce.

1 White paper on "E-Commerce", OECD, 1997

 2

1.2 Research Methodology

1.2.1 Research Problem

The project aims at analysing the industry of e-commerce by researching on various

articles and areas related to the same. In addition to this, we shall be discussing about the
methods of taxation on e-commerce industry.

1.2.2 Rationale

The period of industry has always been ever growing and flourishing with the
advancement in technological developments. Time and again we have interactions with
the e-commerce, thus it becomes a matter of pertinence to study regarding taxation on the
e-commerce industry, so it maintains the basic awareness of taxation and governance
among us.

1.2.3 Objectives
• To study the e-commerce industry
• To analyse the concept of e-taxation
• To research on Indian legislations concerning the topic
• To determine the impact of GST in e-commerce
1.2.4 Hypothesis

The recent development in technology has opened new horizons for e-commerce industry.
However, to balance the economy India needs to focus on evolving taxation laws in
respect to e-commerce, as the same has cross-border sovereignty.

1.2.5 Literature Review

• Sumit Dutt Majumder; National Law School of India Review; Vol. 28, no 2;
2017
The Central Goods and Services Tax Bill (CGST) has been passed by the
parliament and has been notified in April, 2017. The article explored the
interplay between India’s upcoming GST regime and its growing e-commerce
sector. It does so by mapping the major features of the GST regime and e-
commerce sector. Thereafter, by analysing the Model GST Law circulated by
the Central Board of Excise and Customs, it voices the major concerns of the
e-commerce players and argues the Law must be re-thought to prevent
regulatory overburden.
 3

• Richard M. Bird and Eric M. Zolt; National Tax Law Journal, Vol. 61, No. 4;
Technology, Privacy and the Future of Taxation, December 2008

Tax systems in developing countries, like those in more developed countries,

face both new challenges and new possibilities as a result of technological
change. In developing countries, taxpayers and tax administrations must cope
with more difficult environments with fewer resources. Some issues (such as
privacy, the benefits and costs of public/private partnerships, and corruption)
are common to both developing and developed countries, but differ in relative
importance in particular countries. Other issues (such as how new technology
may or should influence the way a country's tax system or particular taxes are
designed and administered) may be more important in developing countries.
This paper examines the general issues facing developing countries from
technological changes and provides some promising examples of
technological innovation and application in tax administration and tax policy.

• Saurabh Bagaria; Taxation For E-Commerce- An Indian Perspective, Vol. 6;

2012

The development of electronic commerce (herein after referred to as EC) can

be said to be the greatest event in the history of mankind, next only to the
Industrial Revolution of the early 20th century. Whereas Europe and United
States were the main beneficiaries of the industrial revolution, there are clear
indications that India along with United States and China would be the major
beneficiaries of the EC Revolution. The huge pool of technological manpower
is at the basis of this indication.

1.2.6 Nature of Study

The project is based on analytical method of research wherein first the study the e-
commerce industry and taxation is elaborately laid out from primary sources of data like
the available scientific reports, journals, etc.
 4

1.2.7 Sources of Study

Primary sources of data such as scientific journals and books along with legal sources
including but not limited to the Constitution of India, legislations, judicial decisions, and
statutes have been used. Further, international conventions and writings of distinguished
writers and thinkers on the theme have also been consulted.

1.2.8 Limitations of the Study

The prime and foremost aim of the study is limited to analysing the parameters of e-
commerce and levying taxation on the same. Learning about the legislations concerned
and impact of GST on the subject is the peak of research.

1.2.9 Chapterisation

The project report can be dissembled into six chapters. The first chapter lays down the
introduction on e-commerce and taxation, the second chapter deals with the concept of e-
taxation in India. The third chapter deals with an assisting study on Organization for
Economic Cooperation and Development model treaty and the issue with permanent
establishment. The fourth chapter sums up the two legislations concerning and in
relevance to the subject topic of the project research, whereas the fifth chapter deals with
resolving the issue related to taxing of digital goods. The final chapter i.e. sixth chapter
deals with the impact and sustainability on e-commerce industry and its taxation with the
introduction of Goods and Services Tax (GST).
 5

2. E-TAXATION IN INDIA
E-commerce by using information technology is a new way of conducting, managing and
executing business transactions. The World Trade Organization Ministerial Declaration on e-
commerce defines e-commerce as “the production, distribution, marketing, sales or delivery
of goods and services by electronic means.”2 According to the Internet Tax Freedom Act e-
commerce includes any transaction conducted over the internet or through internet access,
comprising the sale, lease, license, offer, or delivery of property, goods, services, or
information, whether or not for consideration, and includes the provision of internet access.”3

As e-commerce occurs in various forms and between various entities in the market, the
question is how to tax it and if the taxing goods are digital download in the form of content or
information? The Government has always been taxing brick n mortar businesses as per the
statutory provisions. It establishes the boundaries of legitimate state authorities to impose a
duty to collect sales and use taxes and reduces litigation concerning those taxes. So far, the
brick n’ mortar businesses are being taxed on the principles of physical presence or
‘substantial nexus’ criteria. The “click and mortar” sellers are required to collect sales taxes
based on their substantial nexus in a state where their product is delivered. Presumably the
point of sale is the state to which the goods are shipped, and thus, the consumer owes sales
taxes to this state. It is important that transactions should not be immune from taxation solely
because the sale is conducted through a medium distinct from that of a traditional brick-and-
mortar retailer. Similarly, it is not prudent to tax these e-commerce models purely on the basis
of traditional approach to ‘brick n’ mortar’ taxation as they have their own unique features.4

2.1 Uniqueness of E-Commerce Taxation5

• The lack of ‘physical’ connection between a consumer in one state and a seller in
another state.

• Ever changing location of web servers hosting the website, meant for online
transactions;

• Relocation of businesses in tax havens.

2 www.wto.org
3 Sharma Vakul, ”Information Technology Law and Practice” 2008 Universal Law Publishing Co. at 319
4 Id
5 Id
 6

• General confusion regarding which country has the right to tax the transaction, and at
what rate.

• Non taxation of digital (intangible) goods, like software, music and data or
information.

• Export and import of digital (intangible) goods across international borders without
paying customs duty or tariffs, thereby bypassing the existing export import policies,
regulations and tax system.

• A parallel channel of transactions, ignoring the traditional documents based banking

practices.

• The general lowering down of barriers to trade for the smaller business entities.

• Complete disregard to accounting and audit procedures.

In online environment a new tax system is required to redefine the basis of taxation like
what should be the modus operandi of collecting tax and what constitutes permanent
establishment.

2.2 Issues Emerging from Online Transactions

As e-commerce represent online transactions involving consumers and businesses is

occurring instantaneously, which makes it difficult to determine who the buyer and seller are
and where they are respectively located. From a point of electronic taxation following issues may
emerge:

 Who is the customer?

 Where does the customer live?
 Did the transaction constitute sale of tangible property, the
performance of a service, or the transfer of intangible property?
 Which jurisdiction has the authority to tax the sale?
 What online activities constitute sales for sales tax purposes?
 What constitutes a business connection/substantial nexus within a
taxing jurisdiction?
 Can Central and/or State Government(s) technologically capable to
monitor all online transactions?
 What kind of record retention requirements is necessary for tax
purposes?
 7

It is the nation state’s constitutional prerogative to levy taxes on any online economic activity
and for that purpose every nation state has a right to define its own e-commerce taxation
principles.6

The foremost problem associated with internet based commerce is fixing the place of the
transaction. The place where a web server is located or the place where a user initializes the
transaction and the server where the payment is collected may be different. Electronic
transfer of funds heightens the risk of money being sent to tax havens. The essential question
is whether internet based trading is cross border. Political demarcations notwithstanding,
administration of taxes would prove highly complicated in the borderless internet. Two
methods are forthcoming

1. To treat all individual based trade as having originated in the country where the server
is located
2. To treat business to business trade on the basis of physical presence or permanent
business establishment terms widely used in double Taxation treaties.7

2.3 The Basis of Taxation in Online Environment

As the organization for Economic Co-operation and Development (OECD) a 30 members

organization has proposed that the basis of any online taxation system should be free,
effective, certain, flexible, equitable, simple and dynamic. The Idea is to create uniform mode
of taxation whether offline or online.8

2.4 Constituting Permanent Establishment

The primal question, in order to understand the basis of taxation in online environment, needs
to be answered is what constitutes a physical presence or substantial nexus?

a. Is it downloading of the website and its contents at a particular location (buyer’s

place of residence)?
b. Is it the location of web server, hosting the website?

If we looks from the point of establishing “minimum contacts” and “purposeful availment”
then the nature and mode of the transaction with the resident that establishes the physical
presence of the seller in the forum state. It would render the seller taxable in every possible

6 Supra 2
7 Singh Yatindra, Justice, Cyber Laws Fourth Edition, Universal Law Publishing Co. at p 364-365
8 www.oecd.org
 8

taxable in every possible taxable jurisdiction. But if one treats presence of a web server as
permanent establishment for the purpose of electronic taxation then it would be make seller
solely taxable at the jurisdiction where the server is located.9

9 Supra 2
 9

3. ‘Organization for Economic Cooperation and

Development’ Model Treaty
According to the Art – 5(1) the OECD Model Treaty defines “permanent establishment” as “a
fixed place of business through which the business of an enterprise is wholly or partly carried
on”. Art – 5(2) defines certain types of activity per se permanent establishments including
offices, factories and mines.

According to the new OECD Commentary, on the “OECD Model Treaty” issued on January
28, 2003, a website is “a combination of software and electronic data” and “does not in itself
constitute tangible property”. Paragraphs 42.1 to 42.10 have been added immediately after
paragraph 42 of the Commentary on Art – 5. It further clarifies:

a. Whether a website constitutes a place of business

b. Whether location of a server constitutes a permanent establishment
- When an ISP hosts its website, or
- When an enterprise owns (or leases) and operates the server on which the
website is stored
c. Whether the location of a computer equipment constitutes a permanent establishment
when functions performed through that computer equipment exceeds the preparatory
or auxiliary threshold.10

3.1 Whether a Website Acts as a Permanent Establishment?

According to Para 42.2 an Internet website which is a combination of software and electronic
data does not constitute tangible property in itself. A website therefore does not have a
location that can constitute a “place of business” as there is no facility such as premises or, in
certain instances, machinery or equipment as far as the software and data constituting that
website is concerned.11

3.2 Whether a Server Acts as a Permanent Establishment?

10 Supra 2
11 Supra 7
 10

According to the Para 42.4 the distinction between a website and the server on which the
website is stored and used is important since the enterprise that operates the server may be
different from the enterprise that carries on business through the website. In order to
constitute a fixed place of business, a server will need to be located at a certain place for a
sufficient period of time so as to become fixed.12

3.3 If an Enterprise Hosting its Own Website

If the enterprise carrying on business through a website has the server at its own disposal, for
example it owns (or leases) and operates the server on which the website is stored and used,
the place where that server is located could constitute a permanent establishment of the
enterprise. Such location may thus constitute a “fixed place of business” of the enterprise
that operates that server.13

3.4 Taxation Practices in India

The term “taxation” has been defined in Article 366(28) of the Constitution of India in the
following terms:

‘taxation’ includes the imposition of any tax or impost, whether general or local or
special, and ‘tax’ shall be construed accordingly;”

The aforesaid Article should be read along with Article 265, which states that: “no tax shall
be levied or collected except by authority of law”.

Eligibility to tax is not the same as liability to pay tax. The former depends on the charge
created by the Act and the latter on computation in accordance with the provisions in the Act
and Rules.14

3.5 Issue of Residence in India

3.5.1 When Person is a Resident in India

Taxation in India is based on jurisdictional nexus, source of income and status principles. The
principle of jurisdictional nexus determines whether tax can be levied; source of income is

12 Supra 2
13 Supra 2
14 Universal Radiators V. C.I.T (1993) 201 ITR 800,805 (SC)
 11

about grouping the income under different heads and taxing them separately; and an assessee
as defined in S.2 (7) of the Income Tax Act, 1961 means a person by whom any tax or any
other sum of money is payable under the said Act. In Pradeep Jain V. Union of India 15 it was
held that in view of Art – 5 of the constitution of India every person who is domicile in the
union territory of India is a citizen of India and a citizen of India could be a domicile of any
state forming part of India.

3.5.2 When Company is a Resident in India

According to Sec – 2(30) under the Income Tax Act 16 a person is a non-resident only if he is
not a ‘resident’. For a company the residential status depends upon location of the control and
management of its affairs and for individuals, it depends on their physical presence in India
and.

Under Section 6(3) of the said Act a company is said to be resident in India in any previous
years if:-

i. It is an Indian company; or
ii. During that year, the control and management of its affairs is situated wholly in India.

The doctrine of the ‘control and management’ was laid down in De Beers Consolidated
Mines Ltd. v Howe (Surveyor of Taxes17. In this case it was held that generally the control and
management of a business remains in the hands of a person or group of persons and the
question to be asked is wherefrom the person or group of persons controls or directs the
business. The real business is carried on where the central management and control resides
and not from where the business operations are carried on.

3.6 Establishing Business Connection

A business connection usually means an existence of business relationship between the

business entities. The Act has not provided any exacting definition to the expression business
connection. Nevertheless, the said expression has often been used to denote business
relationship between a resident and a non-resident and hence the tax is payable on any such
business income, accruing or arising, whether directly or indirectly, through or from any

15 (1984) 3 SCC 654

16 1961
17 [1960] AC 455 (HL)
 12

business connection in India.18 Also even as an agent any person in India may have any
business connection with the non-resident.19

It was held by the Supreme Court in CIT v R.D. Aggarwal & Co.20 that “a business
connection involves a relation between a business carried on by a non-resident which yields
profits or gains and some activity in the taxable territories which contributes directly or
indirectly to the earning of those profits or gains. It predicates an element of continuity
between the business of the non-resident and the activity in the taxable territories: a stray or
isolated transaction is normally not to be regarded as a business connection.

18 Sec 9(1)(i) Of the Income Tax Act 1961

19 Sec 163(1)(b) of the Income Tax Act 1961
20 [1965] 56 ITR 20 (SC)
 13

4. LEGISLATIONS AND ACTS IN INDIA

4.1 Business Connection and the Finance Act, 2003

The Finance Act, 2003 has inserted the following Explanations 2 & 3 in sub-section (1), in
clause (i) of section 9 of the Income Tax Act, to be effective from April 1, 2004, to identify
what constitutes a business connection.

It highlights the establishment of ‘business connection’ when a business activity is carried out
through a person who is acting on behalf of the non-resident. The emphasis is on business
activity rather than physical permanent location of business. That is, one can even extend the
concept of ‘business connection’ to an electronic medium as well.

4.1.1 Establishing Permanent Establishment

In order to tax e-commerce, it was felt that the expression ‘business connection’ might not be
enough. It led to the constitution of a high-powered committee on Electronic Commerce and
taxation by the Central Board of Direct Taxation (CBDT) 21 on December 16, 1999. The
objective of the Committee was to examine the projected growth of E-Commerce business
and whether it should be subjected to the taxation.

4.2 Establishing Permanent Establishment and the Finance Act, 200322

The Finance Act, 2003 has inserted the section 44-DA in the Income Tax Act, to be effective
from April 1, 2004,

“…where such non-resident (not being a company) or a foreign company carries on business
in India through a permanent establishment situated therein, or performs professional services
from a fixed place of profession situated therein, and the right, property or contract in respect
of which the royalties or fees for technical services are paid is effectively connected with
such permanent establishment or fixed place of profession, as the case may be, shall be
computed under the head "Profits and gains of business or profession" in accordance with the
provisions of this Act…….”

Thus, it is important to note that the legislatures have started giving due recognition to both
Permanent Establishent and business connection for the purpose of taxing the non-residents.

21 Kanwaljit Singh committee.

22 Supra 2
 14

Also, no attempt has been made to extend either the concept of ‘business connection’ or the
‘Permanent Establishent’ to a website, server hosting a website or ISP hosting a website.

It seems that the aforesaid concepts are extendable to include taxing of e-commerce.

As the Finance Act of 2002 and 2003 has already adopted the concept of “permanent
establishment”, it would be only logical if it were further extended on a case-by-case basis to
cover e-commerce operations as well.

4.4 BPOs as Permanent Establishent

The Government of India has recently notified (September 2004) that the income tax
department will apply the “arm’s length price” principle to determine the profits of a foreign
company, earned out of its Permanent Establishent in India providing BPO services.

That is, if a foreign company carries on business in India through a Permanent Establishent,
its profits will be attributable to the business activities carried out in India and hence will
become taxable in India.

Further, a foreign company will be treated as having a Permanent Establishent in India if that
company carries on business in India through a branch, sales office or through an agent who
habitually exercises an authority to conclude contracts or regularly delivers goods or
habitually secures orders on behalf of the principal.
 15

5. TAXING DIGITAL GOODS

Digital goods refers to information-based products that can be digitized and delivered via
electronic networks in the form of software, shareware, MP3 music, e-books, photographs,
stream video, data, database etc.

Uniqueness of “digital goods” is in terms of :-

(a) low cost of production, i.e. duplication or batch production;

(b) online delivery of the goods; and

(c) faster transaction time.

Digital Downloads & Applicability of Bit Tax

The concept of subjecting the digital downloads to bit tax has its own limitations as it treats
all information downloads equally, whether downloading music or any database.

The focus is on how many ‘bits’ of content has been downloaded. A customer is required to
buy from the ‘bit-credits’ from the ISP to be used in downloading the digital contents. Every
download is ‘metered’ by the ISP and accordingly bit tax is charged and deposited with the
revenue authorities.

The problem with bit tax is that it is measured quantitatively rather than qualitatively.

Difficulties in Assigning Tax Value to a Digital Download

• Value of the download

• Accounting transparency at the seller’s end

• Monitoring or auditing of such electronic activity

• Verification of customer location

• Responsible for verification

 16

5.1 Tax on the Sale or Purchase of Goods

According to the Art - 286(2) Parliament may by law formulate principles for determining
when a sale or purchase of goods takes place in any of the ways mentioned in clause (1) and
according to Art - 269(3) Parliament may by law formulate principles for determining when a
sale or purchase of goods takes place in the course of inter-State trade or commerce of the
Constitution, Parliament enacted the Central Sales Tax Act, 1956.

5.2 Situs of the Sale or Purchase

It is to be noted that Section 3 of the Central Sales Tax Act, 1956 contains the principles to
determine when a sale or purchase of goods takes place in the course of inter-State trade or
commerce. Section 4 embodies the principles to determine when a sale or purchase of goods
is said to take place outside the State and Section 5 contains the principles when a sale or
purchase of goods is said to take place in the course of import or export.

5.3 Taxing Digital (intangible) Goods in India

In India, under Article 366 (13) of the Constitution the expression “goods” includes all
materials, commodities and articles.

For intangible goods, in India there is no Constitutional provision central or state tax
legislation, which specifically defines it.

In the absence of any statutory definition of intangible goods it would be difficult to extend
the expression “sale or purchase of goods” to cover the “intangible goods” as well.

In Tata Consultancy Services v State of Andhra Pradesh 23, the two member bench of S.
Rajendra Babu and R.C. Lahoti, JJ. has referred the question whether the branded software
which is an intangible intellectual property being product of thought, creativity and intellect
be classified as ‘goods’ for the purpose of the Andhra Pradesh General Sales Tax Act, to a
Larger Bench.

On 5.11.2004, a Constitutional Bench headed by Justice Santosh N Hedge, held that when a
person goes to buy a CD containing the software, he does not pay mere for the CD but for the
software contained in the CD.

23 2001 (129) ELT 3 (SC)

 17

The contention that software is merely “knowledge” or “intelligence,” and such is not
corporeal and thus not taxable is erroneous. Once the “information” or “knowledge” is
transformed into physical existence and recorded in physical form, it is no longer in
intangible form but a corporeal property and hence taxable.24

Earlier in CCE v Acer India Ltd25 it was held that no Central excise duty was payable on a
software loaded in a hardware, i.e. computer.

Although a computer may not be capable of effective functioning unless loaded with software
no Central excise duty would be leviable upon determination of the value thereof by taking
the total value of the computer and software.

For example, in the absence of any statutory definition of intangible goods it would be
difficult to extend the expression “sale or purchase of goods” to cover the “intangible goods”
as well.

24 AIR 2005 SC 371

25 (2004) 8 SCC 173
 18

6. GST AND IMPACT ON E-COMMERCE

TAXATION
India’s new GST system is designed to make taxes easier, especially for small businesses. But
if you run an e-commerce company, the rules are slightly more complicated. To make sure
you’re keeping the right records and paying taxes correctly, it’s important to understand how
the GST affects your online business.

6.1 Mandatory GST Registration for Online Sellers

One of the most important things the GST law did was reduce the taxes on very small
businesses. Companies that bring in less than Rs 20 lakh, or Rs 10 lakh in northeastern states,
do not need to pay GST. As an e-commerce business owner, this threshold doesn’t apply to
you. Under GST, all online sellers must register and pat GST. This means that even if you
only bring in Rs 1 lakh, you must go online and get a GSTIN. In addition, you’re required to
file monthly returns and pay taxes on all qualified sales.26

6.2 More Opportunities for Interstate Sales27

Under India’s old tax system, it was complicated to sell products across state lines. Each time
you did, you had to deal with a variety of different taxes and the complicated paperwork that
went with them. For small businesses that didn’t have the budget to pay a tax professional,
the possibility of extra sales was simply not worth the hassle. This meant your ability to grow
was limited by where you lived.

The new tax system has eliminated all of the confusing interstate taxes and replaced them
with a single tax. With GST, you can sell to customers in your own state and in other states,
all without worrying about multiple taxes. As a result, you have the opportunity to sell
products to customers across India or around the world. It also gives you the chance to
compete with big corporations. Although that sounds intimidating, it’s great for you and your
customers. After all, as a small business, you may be able to offer more flexible quantities,
more personal service, and other perks that can draw shoppers away from bigger suppliers.
As a result, GST makes it easier to grow your business without taking on an extra tax burden.

26 https://cleartax.in/s/impact-of-gst-on-e-commerce-marketplace-sellers
27 https://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=2cf77603-926f-43c0-86b8-
6842bcd1de7b&txtsearch=Subject:%20Taxation
 19

6.3 Direct Sellers vs. E-commerce Marketplaces

The way you pay GST depends on the type of online business you run. There are two main
types of online businesses. The first uses a direct-sales method, where you buy or make
products and sell them to customers through your website. If that’s how you operate, you can
simply follow standard GST filing rules.

The second type of online business is an e-commerce aggregator. An aggregator is a website

like Flipkart, which connects buyers and sellers and takes a commission on each sale. Since
they don’t always sell the products directly to customers, these types of e-commerce
businesses must handle GST differently. This happens with a tax collected at source, or TCS.
When your website facilitates a sale between a buyer and a seller, GST law requires you to
deduct 2% of the sale before you send payment to the seller. You must pay that amount to the
government. Then, your sellers can claim that tax as a deduction on their own GST filings.

If you’re an aggregator, both you and your sellers must report all sales to the government.
Your reports and their reports must match exactly. If they don’t, your sellers are responsible
for the outstanding GST. The TCS requirement helps you spot and remove sellers who aren’t
reporting sales accurately.
 20

CONCLUSION
The emerging model which would allow countries to eliminate source based taxation in
favour of residence based taxation for international e-commerce transactions would prevent
poor countries with international e-commerce consumers to tax income made on those
international e-commerce transactions. It is argued that less confusion would exist if only the
business organization’s country of residence had the jurisdiction to impose taxes. Regardless
of whether this is true a residence based tax model would have many unfortunate
consequences. The emerging model poses problems because it favours developed countries at
the expense of developing countries.

The non-static status of the entire area of electronic commerce makes the prediction of future
developments with any acceptable degree of certainty or probability impossible. Tax policy
therefore must continue to develop in a manner which facilities the growth of electronic
commerce and adapts to administrative issues as they arise or at least before electronic
commerce creates a threat to the collective revenue base.
 21

BIBLIOGRAPHY AND REFERENCES

BOOKS

1. Sharma Vakul, Information Technology Law and Practice, Universal Law Publishing
Co.

2. Singh Yatindra, Justice Cyber Laws Fourth Edition, Universal Law Publishing Co.

3. Filzgerald Brain, cyber Law, Vol. 1 Second Series Ashgate Draft Mouth 2006

4. J. Craig William, Taxation of e-commerce, Second edition, Tolley Lexis Nexis

Publishing Co.

Websites

• http://www.inter-lawyer.com/lex-e-scripta/articles/e-commerce-pe.htm
• http://www.legalservicesindia.com/articles/tax_ec.htm

Journals

• Introducing Electronic Commerce and EDI-EDI and the business cycle at

http://www-106.ibm.com
• Priti Suri & Associattes, Open source and the law p.no.290,2006.
• Chetan Nagendra ,"The Net and the Tax Net". The Indian Tax Structure and
the challenges posed by
• E-Comerce, in Nandan Kamath (ed) Law relating to computers, Internet and
E-Commerce, p.349.
• Sood V., Cyber Law simplified p.345