Online businesses are booming and gaining popularity not alone in India but worldwide. More and more small businesses are looking to expand by adopting online platforms for carrying out their businesses. Amidst the start-up culture boom, online medium is becoming the primary source of trade and commerce. Also, the covid-19 pandemic triggered consumer behaviour and made more people accustomed to online purchases of goods and services.
E-commerce offers a more comfortable customer experience in terms of doorstep delivery, convenient payment modes, and a wide product range. The e-commerce market in India has grown to $55 billion as of 2021, and there is an expectation that it will cross $100 billion in a few years. Also, the Indian e-commerce market contributed almost 0.76% of its GDP in 2017. There is an expectation that the e-commerce market contribution will grow to 2.5% by 2030.
Understanding the legal and tax implications becomes vital for everyone who wants to enter into this bandwagon as this market grows. This article will discuss the taxes levied if you start an online business.
Direct Tax
Direct tax is the most common and straightforward form of tax applicable in India. Income tax is a form of direct tax levied by the Indian government. Income Tax, a form of direct tax, is levied on the business profits. Any entity or residential individual running a business in India, whether online or through offline mode, is liable to pay taxes according to the entity’s status. For instance, a partnership firm or a private company is liable to pay tax at 30% of the profits earned subject to other terms and conditions. In contrast, an individual carrying out a freelancing business must pay taxes according to the income tax slab.
Indirect Taxes
Goods and Services Tax (GST) is a form of ‘indirect tax’ applicable in India. GST replaced erstwhile taxes like services tax, VAT, customer and excise duty, etc. Indirect taxes are the ones that are not directly levied on your income; instead, they are indirectly charged on the value-addition of goods and services. GST is a destination-based tax which means that the goods and services are taxed when they are consumed.
The Goods and Services Tax Act define ‘electronic commerce’ as the supply of goods/services over a digital or electronic network. These would include selling goods/ services through own website or e-commerce websites like Amazon, Flipkart, etc. It also consists of the supply of services by any service company like Ola, Uber, Oyo hotels, etc. All these services would attract direct as well as indirect tax.
Before GST, there was an additional tax known as ‘entry tax’. The state government imposed an entry tax on certain commodities on the movement of goods between various states. This tax has been now subsumed under the GST Act.
Equalisation levy
Equalisation levy (EL) is a direct tax type introduced in 2016 to tax digital transactions. It is a part of the Income Tax Act, 1961.
EL is explicitly levied on any payment received by a non-resident for providing online advertising services or provision of digital space for online advertising or any related services. For instance, if you have an online brand and have paid more than Rs.1 lakh to a ‘Facebook ads’ for availing advertising service, then you have to deduct 6% of gross consideration as ‘equalisation levy’ tax.
These three are the primary taxes that become applicable to businesses. Direct and Indirect taxes apply to all businesses irrespective of the mode of operation. However, an equalisation levy is a type of tax that applies to specified services (online advertising) and specified entities. These taxes have compliance norms, and failure to comply leads to penalties and prosecution. Hence, one should adhere to all these tax compliances applicable to their businesses.
For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in
I am a Chartered Accountant by profession with 4+ years of experience in the finance domain. I consider myself as someone who yearns to explore the world through travelling & Reading. I believe, the knowledge & wisdom that reading gives has helped me shape my perspective towards life, career and relationships. I enjoy meeting new people & learning about their lives & backgrounds. My mantra is to find inspiration from everyday life & thrive to be better each day.
