VAT and CST on Ecommerce Business in India

There are different forms of e-Commerce. Many businesses such as Amazon, Flipkart, and Snapdeal have their e-Commerce activities in India. Most of these are consumer oriented but follow different business models. All transactions are however subject to certain taxes irrespective of the business model they follow.

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VAT and CST on Ecommerce Business in India

Here are the three fundamental types of taxes for e-Commerce in India.

Value Added Tax (VAT): It is imposed on consumer spending and is a consumption tax. It is collected only in the state where the sale takes place. And for this the seller and the buyer should be from the same state.

Central Sales Tax (CST): This tax is applicable on inter-state transactions, meaning that the buyer and seller are from different states. In this case, the taxes are again dependent on the nature of the goods and can vary between 12.5%, 4%, 2%, and 1%.

Let us take a look at the different kinds of e-Commerce in India and the tax laws applicable to them.

Business to Consumer (B2C): This is obviously the most basic model where the buyer and seller interact online. Products are showcased on the site and a transaction happens when a product is chosen and price is paid. The website could just be facilitating the transaction and in turn is paid a commission. The biggest rationale for this model is the elimination of the need for physical stores. Depending on whether the transaction is inter-state or intra-state, VAT or CST is applicable in such a business model. The taxes levied are subject to the tax laws of a particular state as also the nature of products.

Business to Business (B2B): In this type of e-Commerce, both participants are businesses. Consequently, the volume and value of transaction can be big as well. One example of this type of a transaction could be that of a gadget manufacturer sourcing components online. In this business model, the e-commerce company receives an order on its website, issues an invoice to the buyer, and places an order with a manufacturer for delivery of the product. VAT is applicable in this case if all parties are from the same state and CST if they belong to different states.

A service tax may also be levied if the company is also taking delivery charges.

Consumer to Consumer (C2C) This model can also be called a Consumer-to-Business-to-Consumer model. Examples are eBay, Quikr, etc. This kind of a transaction enables one consumer to sell to another through an online business portal. This kind of a model does not invite any sales tax since the e-Commerce vendor is just a connecting platform. However, a service tax is applicable since the website will charge a service fee.

Challenges: With a spurt in the volume of e-commerce businesses in India, the rules of taxation on such transactions are blurred. Decoding the CST/ VAT structure for online retailing is a challenge today since it is increasingly becoming difficult to identify the various business models. Should these offerings be categorized as ‘Goods’ or ‘Services’? Should they be levied with CST or VAT or ST? All online transactions are liable to be taxed but the important issue is to identify the right tax model.

The big debate: States claim to be facing large revenue losses due to unclear tax rules on e-Commerce. A dealer selling a product in the same state has to pay VAT. However, an e-retailer selling from a warehouse in one state to a consumer in another would mean that the VAT goes to the state with the warehouse. Thus, the consumer state is deprived of levying VAT. E-commerce vendors are of the opinion that since they are just a platform connecting the buyer and seller, they should only pay a service tax. VAT and CST should be handled by the respective dealers. States keep changing their tax policies and this does not work in favour of e-Commerce businesses.

As an example, in Karnataka, e-vendors like Flipkart and Amazon were asked to pay VAT for products stored in the state’s warehouses even before orders were placed for them. The state of Madhya Pradesh wants clarity on ‘point of sale’. Kerala wants a tax structure that doesn’t discourage traditional traders in the state. For e-businesses with inter-state transactions, the changing VAT and CST laws are a major hindrance.

The taxation rules and regulations for e-Commerce need a more streamlined approach in India. It remains to be seen what the Goods and Service Tax allows for. However, till such time, it is important for upcoming e-Commerce companies to choose the right model to save on taxes as well as avoid any sort of resultant litigation.

Is your startup compliant?

Is your startup compliant?

Whether you are a giant corporation or a startup, to be successful, it is important to analyse if you are compliant and are following certain laid-down protocols. It’s imperative to keep a close eye on the laws in the city or state you operate in, failing which you are likely to overlook compliance responsibilities and face damaging penalties and lawsuits that could severely impede the progress of your business entity.

Many organizations show a great deal of promise. However, because they bypassed important compliance procedures they have had founders step down, executives replaced, and employees lost. A business entity that is compliant is automatically trustworthy to its clients and investors. All businesses, particularly startups, should follow certain compliance protocols.

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Is your Startup Compliant?

This article will give you a lowdown on all compliances.

1) Choosing the right business entity: The first major challenge faced by any entrepreneur is choosing the right business vehicle for their venture. This choice will in the near and long term affect the startup’s viability, visibility, sustainability, suitability, and profitability. Your long-term goals, vision, and objectives will decide whether the startup will be established as a private limited company, public limited company, partnership firm, or a limited liability partnership. Each of these categories has a different set of compliance procedures and laws. To avoid any backfiring in the form of legal hassles or otherwise, it is better to be aware of all these formalities right at the inception stage.

2) Statutory Compliances: The credibility of any business highly depends on its compliance with all the applicable laws. For a Company and LLP, the mandatory compliances with the Registrar of Companies (RoC) are the most essential of all. Some of the important provisions include appointment of Auditor, conducting board and shareholder’s meetings, filing statutory annual returns, and maintenance of statutory registers. These criteria should be met and will be verified by the investors.

  • Appointment of Auditors The First Auditors of a Company should be appointed within one month of its incorporation and shall shall hold office till the conclusion of the first annual general meeting. Thereafter, an auditor shall be appointed who can hold office for a period of consecutive five years.
  • Conducting board meetings: At least one meeting should be conducted in every three calendar months. Four such meetings should be held every calendar year. The Chairman of the said meeting signs the minutes of the meeting.
  • Filing Financial Statements and Annual Returns: Private Limited Companies are required to file its Annual Accounts and Returns disclosing details of its shareholders, directors etc. to the Registrar of Companies. Such fillings are required to be made once in a year, usually before 30th September.
  • Maintaining Statutory Registers and Records: A Private Limited Company has to maintain various statutory registers and records as required by the Company law such as Register of shares, Register of Members, Register of Directors etc. Besides, Incorporation documents of the company, Resolutions of the meetings of the Board of Directors, Minutes of the Board Meetings and Annual General Meeting etc are also required to be preserved by the Company.

3) Audit Compliances: The purpose of a statutory audit is to determine whether an organization is providing a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records and financial transactions. Compliances related to audit include appointment of the Statutory Auditors of the Company and finalizing annual accounts with the Auditors of the Company.

4) Payroll compliances: When you start an organization, it is obvious that you will have employees working for you. There will be employees, independent consultants and contractors as well. Such professional relationships are governed by various labour legislations. For instance, A business with an employee strength of over 20 needs to comply with ESI and PF regulations.

5) Taxation: A business has to pay taxes to the Central/State government or local bodies. Thus, every new entrepreneur should have the know-how of the aspects of taxation. Tax laws vary with sector and any recent changes should be within an entrepreneur’s radar. Tax compliance measures vary with the kind of business and the nature of services. A company selling goods would need to comply with the state VAT laws. Similarly, businesses working as service providers need to obtain service tax registration, make service tax payments, and file service tax returns on time. The business should also comply with relevant income tax rules and regulations.   The Comparison chart will give you a clear distinction between the compliance requirements of all the three forms of business.

Factors of Comparison Private Limited Company One Person Company Limited Liability Partnership Partnership/ Proprietorship
Statutory Compliances Mandatory Mandatory Compulsory Not Applicable
Maintenance of Books of Accounts Mandatory Mandatory Mandatory Required for Income Tax
Annual General Meetings (AGM) Mandatory Not Applicable Not Applicable Not Applicable
Annual Tax Filings Mandatory Mandatory Mandatory Mandatory
Statutory Audit Mandatory Mandatory If turnover > 40 lakhs or contribution > 25 lakhs Not Applicable
Tax Audit If turnover > 1 Crore If turnover > 1 Crore If turnover > 1 Crore If turnover > 1 Crore
Taxation Profits Taxed at 30% Profits Taxed at 30% Profits Taxed at 30% Partnership – 30% Proprietorship – Individual Slab Rates

VenturEasy strongly believes that Compliance should be viewed as more than just a process. It should become a part of your startup culture! This article was first published in YourStory

The importance of a Website Privacy Policy

With the development of technology and e-commerce, the related problems are also on the rise. While websites are growing more interactive and user-friendly, the need for a privacy policy in place that ensures the data security is also becoming essential.

Web users have the right to know that the personal details that many business websites, blogs and online shopping sites ask them to fill out are in safe hands. It is not just to fulfill legal demands, but also an effective tool of transparency towards customers. It is a global norm that such a legal document be exhibited online wherever collection or sharing of personal information is involved.

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Importance of a Website Privacy Policy
The India context

India is the biggest platform of data outsourcing and has, in the recent past, faced a lot of cyber crime, data theft, etc. Therefore, there is a need for a regulating mechanism to deal with these crimes effectively and ensure highest security of internet databases.

The Information Technology Act of 2000 is the consolidated document that lays down guidelines for the development and maintenance of websites, electronic records and digital signatures. The Act defines cyber crimes such as hacking, infusion of virus, unauthorized copying of, tampering with information and also prescribes penalties for them.

An amendment to the Act, in 2008, brought such activities as circulation of offensive or obscene content, identity theft, impersonation, cyber terrorism, voyeurism and child pornography into the criminal domain.

A further amendment in 2009 states that any negligence while handling sensitive personal information is likely to pay penalty and is liable for punishment. This includes disclosure of sensitive personal information without consent of the person.

What is a Privacy Policy?

A privacy policy is a legal document, aimed at protecting online consumers against many unlawful activities and misuse of personal data. It is a very important document and must be crafted in simple terms so as to be easily understood by anyone without any obscurity.

A website privacy policy would consist of the following sections: – Introduction: A brief about the organization, the business and any other specifics about the website.

– The Information: The users need to be clearly told what information is being collected, e.g. forms to purchase, subscribe and sign up. Other information such as hostnames and IP addresses should be mentioned here.

How the data is collected: Here, the method of collection of information is to be described. Is it automated? Is the user asked to fill forms or refer other names, addresses, etc.

– Storage of data: The location of the database and any country or region specific laws that apply are to be mentioned.

– Third party sharing: Almost all websites share the information in their databases with others, such as courier services, or banks. The user needs to be informed that their information maybe shared within the legal domain.

– Website contact details: Email addresses, postal addresses, phone numbers, etc. have to be mentioned so as to allow users to get in touch in case of queries or grievances.

Sensitive Personal Information According to The Information technology Rules, 2011 sensitive information includes the following.

• Passwords

• Financial information such as bank account, credit card or debit card details.

• Information describing physical, physiological or mental health condition of a person

• Sexual relationship and orientation

• Medical records

• Biometric data.

Creating, updating, monitoring or managing privacy policies also involves certain best practices. For those who are responsible, whether it’s part of your job because you’re an entrepreneur and everything is your responsibility, or you’re hoping to add this area to your book of knowledge, there are certain best practices to keep in mind. Some of the points are given below:

1) The policy must be written in plain English. If a lawyer is drafting the policy then you must ask it to be written in simple language which will be understood by the consumer or visitor.

2) Something found free on the Internet should not be just cut and pasted as your own. The risk of penalties is very real and therefore your policy should be your own and reflect the unique circumstances of your site.

3) The privacy policy should be updated regularly to reflect changes in the online environment, what your company actually does with that information, and clarify areas that may be vague. This updation must of course also be communicated to the visitor.

4) Follow the policy! Do not deceive the consumers by not following the policy. What is written should be followed.

5) Consumers, readers, forum visitors, or others should have the right to opt out of having their personal information retained.

6) A privacy policy should be easy to find and accessible.

7) The information that you take from consumers should be secure too. The potential disclosure or sale of private information can be devastating.

8) Try and get a well-respected privacy certification program for credibility.

9) You should never ask for intrusive or excessively personal information through a privacy policy unless absolutely necessary.

Consumers are becoming increasingly intuitive and will refuse to provide information that they feel is not required. If you do ask for extremely personal information, be clear on why you need it and how secure it will be.

What we post on Facebook, Twitter or other online social media all constitute personal information and we cannot imagine how this kind of data can be used or misused. Privacy policies are often not given the attention they deserve. A company may dish out a policy without even realizing its actual merit.

We must make an effort to read these policies as consumers and these policies also say a lot about what the company stands for and what it wants to achieve. Information is key to future growth and it gives insights of what cannot be replicated any other way. We all want our information to be safe and secure and a well-written privacy policy is the first step to doing just that!

Get in touch with us at [email protected] if you would like us to draft a Privacy Policy for your startup.

Protecting your Brand: Trademark Basics for Startups

When you are a startup, there many things to consider such as competition, financing, resources and pricing. However, registering your trademark can remove one such big worry from your mind.

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Protecting your Brand: Trademark Basics for Startups

What is a trademark? A trademark, by definition, is a unique symbol, word or phrase that is registered legally to represent a company, a service or a product. It identifies and distinguishes a company and its products from other competitors.

The benefits of registering a trademark:

Consumers are influenced by brand value and often end up being loyal to one or two names in the market. Here are some reasons why trademarks are so important.

Safety against identity theft: If a company registers under the same name for a trademark as another, then the ownership goes to the one with the trademark. The cost of litigation not only leads you into spending tens of thousands of rupees but also causes a lot of damage to your business image.

Recently, the Bengaluru-based online shopping giant Flipkart filed a case against a “copycat” firm FlipkartDiscounts, for copyright and trademark infringement. FlipkartDiscounts was accused of misleading customers by using a similar name, listing discounts on its site and directing them to various other ecommerce portals such as Flipkart, Snapdeal, Amazon, and Paytm. Flipkart won the battle with the Delhi High Court passing an order, restraining the dubious company from redirecting consumers to other sites.

An effective communication tool: A symbol or logo goes a long way in holding the essence for a business, regardless of the language or country. For example, the Nike “swoosh” design is recognized globally. Easy to identify While out in the market, consumers don’t have a search button to help them find what they want. This is where a trademark comes in handy to pick from a large basket. Internet friendly Today, the world is packed into a Smartphone. What most people enter into search engines are brands, when looking for products or services. More searches and hits effectively translate into more brand value.

A valuable asset: Brand value can grow immensely with time. Trademarks work wonders if you are planning to cross-sell, cross-over, or expand into other industrial sectors. For example, a clothing label can easily appeal to consumers in the accessories market. Employment opportunity For the job hunters, a brand can be a very attractive prospect. It is a positive inspiration for candidates who feel privileged to be associated with a prestigious brand. For example, working at Apple or Google .

How is a trademark registered in India?

Once we know the importance of registering trademarks, the next big question is how is it registered in India. However, before applying for the registration, do your homework, and check the uniqueness of your business name, logo, or anything else you wish to register. There are trademark specialists who can be hired for this purpose.

Also, once the name gets a green signal, it is a good idea to file the trademark application before you actually market it in the public domain. Here is a stepwise guide to the process as per the Trademark Act, 1999.

  • Step 1: File your application with the Registrar of Trademarks. The place of application will correspond to the place of business.
  • Step 2: The application can be filed by the proprietor of the firm, either in his own name or in the name of his business entity.
  • Step 3: The application has to clearly mention the class under which the product or service needs to be classified. Schedule 4 of the Trademark Rules, 2002 provides a classification of goods and services.
  • Step 4: A fee of Rs. 4000, per trademark, has to be paid to the Registrar of Trademarks, only after the registration has been approved. The trademark that needs to be registered must be unique or distinctive minus any blasphemy or obscenity. There should be no reference to a living person without his/her consent or the consent of his representative.

The entire registration process takes 18 to 24 months from the date of application. Once an application for registration is received, it is advertised widely, so as to solicit any conflict or opposition.

If a conflict arises, the applicant is required to defend his trademark within 2 months from the date of receipt of written opposition. In case no opposition is received within 3 months from the date of advertisement, the registrar issues a certificate of registration, approving the trademark.

Brands are of great importance to the image of a company. As a startup, it is worth investing time and money on trademarks when launching a new product into the crowded market, especially with the number of ‘me-too’ businesses increasing.

100% FDI in E-commerce Market Place

The rise of e-commerce businesses has slumped the footfalls of offline stores, thanks to the ease of doing business that they offer as well as the increasing number of players in the field. However, if the recent government orders are anything to go by, this trend will soon witness a change.

In order to legitimize the existing businesses of the e-commerce companies operating in India, the government has allowed 100% foreign direct investment (FDI) in online retail of goods and services under the so-called “marketplace model” through the automatic route. To end the discount disputes, it has also brought about new rules which can prove to be a source of disappointment to customers. These rules do not allow marketplaces to offer discounts and cap the total sales from a group company or one vendor at 25%.

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100% FDI in E-commerce Market Place

There has been no FDI till date in retail e-commerce, or business-to-consumer, B2C. Some Indian e-commerce companies such as Flipkart and Snapdeal have been following the marketplace model already and raking in huge foreign investment. Marketplaces are a sort of a platform to bring the sellers and buyers to a common table.

The question now is whether e-commerce companies like Flipkart will have to stop giving discounts online? There have been allegations that e-commerce companies were already not following the norm by not following the existing policy norms. The model was under the scanner of authorities like the Enforcement Directorate. This turns out to be a very cautious step by the government in the wake of the huge inflow of FDI.

The department of industrial policy and promotion (DIPP) defined a marketplace model as an information technology platform run by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. However, FDI was not allowed in companies which do transactions through an online platform, basically companies that own inventories of the goods and services.

According to the new policy, it is mandatory for e-commerce companies to display full details of the sellers in the online platform. Thus, issues of warrantee and guarantee become the responsibility of the seller himself.

Promotional funding is an option adopted by companies like Amazon. Discounts are recommended to sellers on products by Amazon, but they are not forced to adopt these prices. However, since these discounts are financed by Amazon, sellers usually relent. Some sellers are the largest revenue earners for companies like Flipkart and Amazon. Though some e-commerce businesses are gradually shifting to the marketplace model, with the new regulations, this may see an acceleration in pace. Barring some old and giant sellers that earn revenue for these e-commerce companies, this new regulation may see these companies looking out for newer sellers.

E-commerce shares will up the ante by 2% in 2014 to 11% in 2019, while those of physical, organized or modern retail may see a shrink to 13%. The finance ministry has already been finding ways to levy a tax on e-commerce activities such as downloading songs, movies and books, online consumption of news, software downloads, and online sale of goods and services. Hence, these regulations come at a most transitive stage.

Representatives from two retail associations have moved the Delhi high court arguing that online retail companies have gained an undue advantage by being allowing access to FDI through which they are able to provide deep discounts that traditional retailers cannot match. They also feel that that the e-commerce companies are not allowed to sell directly to customers as per the current retail policy. However, they are doing just that in the name of following the marketplace model. This 100% FDI move by the government has takers and critics in equal numbers. The way ahead remains to be seen.