Over the last couple of years, India has changed the way it shops and trades. The unprecedented growth of the e-commerce sector has largely been driven by rapid technology adoption and access to the Internet through broadband, 3G/4G, etc. resulting in an increased online consumer base. Due to the digital revolution, the sector in India has grown four times its size since 2009 and continues to grow at a compound annual growth rate (CAGR) of more than 35 per cent.
Amidst all this action, recently, the Centre liberalised the FDI regime wherein the companies engaged in manufacturing and single brand retail have been allowed to undertake e-commerce activity. This change is expected to further increase the breadth of this sector.
This explosive growth in the e-commerce sector has given rise to multiple tax issues. Besides battling their conventional problems of rising competition, rapidly changing technology, shrinking margins, etc., tax litigation, owing to their innovative business models, is also a matter of concern.
Given that these new business models are here to stay, there is a need for the government to support this sector through enabling changes in the tax and regulatory regime. While expectations of this sector from the Union Budget 2016 are huge, in my opinion, the following key amendments can act as good starters:
1. Advertisement and promotional spend are essential ingredients of new business models as there exists an inherent need to acquire customers. e-commerce companies have spent approximately Rs 2,000 crore on advertisement, marketing and promotional (AMP) expenditure between September and December 2015. Usually, the AMP expenditure can be claimed as a revenue expense for income tax purposes. I believe that a large part of AMP expenditure in case of new business model companies is essentially in the nature of ‘intangible’ (i.e. customer acquisition cost), and hence, a defined category of such expenses should be allowed to be capitalised.
2. The appetite and opportunity for e-commerce companies to raise funds are enormous. Funds are usually raised at various points in the life cycle of such companies. The multiple rounds of funding distort/change the shareholding pattern of such companies and result in lapsing of brought forward tax business losses on account of provisions of Section 79 of the Income Tax Act, 1961. I believe there is a need to carve out an exception under Section 79 of the Act for e-commerce companies, until new business models stabilise in the Indian economy.
3. Many Indian e-commerce companies function as marketplace platforms on which vendors sell their products to customers by logging on to their websites, mobile applications, etc. The source of income of such e-commerce companies is the facilitation fee from the vendors. Typically, the vendors deduct tax at source at 10 per cent under Section 194H of the Act on fees charged by e-commerce companies. Provisions of Section 194H of the Act are only applicable in case there exists a principal-agent relationship between e-commerce companies and their vendors. It is a matter of fact that in a marketplace set up, e-commerce companies do not act as an agent of their vendors. Such a levy of withholding tax not only adds to the compliance burden on vendors but also effects the working capital requirements of companies. I believe that a clarification should be issued by the tax department to address such concerns of companies and vendors at large.
Even otherwise, majority of the e-commerce firms are presently running into losses, and hence, the tax withholding undertaken by their vendors eventually becomes refundable by the tax authorities. The collection, reconciling and safe keeping of tax withholding certificates from vendors, is an administrative challenge. Relaxation in the above provisions shall certainly reduce the compliance burden of companies/vendors and thus, contribute towards the ease of doing business in India.
4. On the indirect tax front, ambiguity and grey areas of interpretation are at the core of the e-commerce sector, especially at the state level, where one of the biggest issues faced by these e-commerce companies (who facilitate sale of goods) is largely the same as that being faced by companies under income-tax i.e. treatment as an ‘agent’ of the vendors selling goods through the website of these companies.
Taking a cue from the state VAT authorities, now even central tax authorities have started creating challenges for e-commerce companies who facilitate the provision of services. Recently, the directorate general of Central Excise Intelligence had initiated investigations against online portals treating them as actual service providers instead of an online portal that is per se facilitating the provision of services. Earlier this month, an official of a leading online travel portal was arrested on the grounds of service tax evasion.
Essentially, these companies are just service providers to the vendors or customers and not acting as agents of the vendors selling goods or services. In the Union Budget 2016, it is urged that the government should issue clear guidelines stating that unless engaging parties otherwise intend, in a pure/managed marketplace model, vendors and e-commerce companies should be treated as acting on a principle to principle basis so as to curb tax challenges for these companies.
5. The government in Union Budget 2015 introduced the reverse charge mechanism in respect of service transactions involving an aggregator in any manner. Under this concept, various e-commerce players are covered and the liability to pay 100 per cent service tax is on the aggregator (i.e. the e-commerce companies) involved. The introduction of the aggregator concept has created a situation wherein an e-commerce player has to discharge service tax in cash and the actual service provider (except service providers engaged in renting of motor vehicles and works contract — where CENVAT credit refund guidelines have been introduced) has CENVAT credit lying in their books of accounts. Also, there is an ambiguity as regards to whether the aggregator is liable to discharge service tax (besides payment of service tax under a reverse charge) on the portion of the commission accrued to the aggregator out of such collections.
The concept of an aggregator has only added to the complications being faced by this sector. In the upcoming budget, the government should either do away with this concept entirely or provide for refund of the accumulated CENVAT credit to all the vendors providing services through such an aggregator. Also, where the concept of an aggregator is continued, commission retained by an aggregator should not be subject to service tax again.
This young generation of budding entrepreneurs is ecstatic about the way the Indian government is encouraging e-commerce and startup ventures. The recently introduced Action Plan by the government for startups, followed by regulatory relaxation by RBI, is certainly a step forward in the right direction and has given a positive vibe to entrepreneurs and the industry. Along with this, redressal of some of the tax issues in the upcoming budget can serve as an icing on the cake.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG in India.
Columnist
The author is Partner, KPMG in India
