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Direct Taxation of E-Commerce Business Start-ups

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e-Commerce is an upcoming business model that is being leveraged by many. Contracting to customers in a world without borders is now a reality. It becomes important to understand the e-Commerce business model, the underlying technologies, the types of businesses that can be conducted using this platform and the issues in determining the taxes on the income.

This presentation was presented by Latha Kamath and Myself at the National Conclave conducted by the Board of Studies of ICAI in Mangalore on the 16th December 2015.

Published in: Business
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Direct Taxation of E-Commerce Business Start-ups

  1. 1. SITUATION • A orders something at B • B has to deliver the order to C • D owns B In which country would the income received by B would be taxed?
  2. 2. UNDERSTANDING AMAZON AMAZON.COM INC – AMZN – HOLDING COMPANY IN USA AMAZON SELLER SERVICES PRIVATE LIMITED - AMAZON.IN AMAZON INTERNET SERVICES PRIVATE LIMITED - AWS Hosting AMAZON IT SERVICES (INDIA) PRIVATE LIMITED – Development and Maintenance AMAZON DEVELOPMENT CENTRE (INDIA) PRIVATE LIMITED – Development and Maintenance AMAZON ONLINE DISTRIBUTION SERVICES PRIVATE LIMITED - PaywithAmazon - Payments AMAZON TRANSPORTATION SERVICES PRIVATE LIMITED - Logistics
  3. 3. TAXATION OF E-COMMERCE START-UPS In the Indian Context
  4. 4. OUTLINE Understanding the e-Commerce Business Taxation Planning the Start-up
  5. 5. UNDERSTANDING THE E-COMMERCE BUSINESS
  6. 6. E COMMERCE DEFINITION – OECD 2009 An e-Commerce transaction is the sale or purchase of goods or services, conducted over computer networks by Automated methods.
  7. 7. UNDERSTANDING THE BUSINESS MODEL OF E-COMMERCE Understanding the Business and Services offered Modus Operandi of the business Communication and other related technologies
  8. 8. ISSUES FOR DIRECT TAXATION OF AN E-COMMERCE BUSINESS Determination of the “economic attachment” • Situs of the Business Taxable Jurisdiction •Inclusion of Cyberspace? Determination of Permanent Establishment in case of a non-resident Legal Difficulty – • Contracting States are different, Hence which law to be applied? Nature of Contract – • Sale of Goods/Sale of Service • Rental of Goods/Service
  9. 9. EXAMPLES OF E-COMMERCE START-UPS IndianStart-ups ForeignStart-ups
  10. 10. TYPES OF E-COMMERCE BUSINESS E - Commerce E-Advertising • Classifieds • Advertisements E-Sales • Online Marketplace E-Delivery • Pure digital content • Online Services
  11. 11. TAXATION
  12. 12. EXAMPLES OF E-COMMERCE INCOMES Business Income • Web/Email Hosting Services (GoDaddy, BigRock) • ITO v/s People Interactive (I) P Ltd • Network Connectivity Services (Cloudflare) • Cloud Services (Google Apps) • Electronic Services (Oyo Rooms, Trip Planning, Ola Cabs) • Commission and Listing Charges (eBay, Amazon, Flipkart) • Advertisement Charges (Google AdWords)
  13. 13. EXAMPLES OF E-COMMERCE INCOMES Royalty • License of off-the-shelf Computer software • Selling or Renting of Copyrighted digital media e.g. Video, Song, Images etc. Fees for Technical Service (FTS)
  14. 14. TAXATION TDS Provisions • Resident • Non Resident Business Income Royalty
  15. 15. TDS PROVISIONS • Provisions of Chapter XVII Resident • Section 195 – Payment to Non Resident or Foreign Company @ the prescribed rates in force (40%) • Royalty @ the prescribed rates in force (10%) Non Residents TDS Deduction Issues • International Transactions • Friendly Procedural Laws
  16. 16. TAXATION Resident Worldwide income Non Resident Income Earned in India (Section 9) Business Income (Permanent Establishment) Royalty
  17. 17. TAXATION OF E-COMMERCE BUSINESS AS A RESIDENT Global Income Taxed in India at 30% + SC + CESS
  18. 18. TAXATION OF E-COMMERCE BUSINESS AS A NON-RESIDENT Indian Income in the nature of Royalty would be taxed in India at 10% (Section 115A) Indian Business Income Taxed in India at 40% + SC + CESS or DTAA Rates whichever is favourable
  19. 19. TAXATION OF E-COMMERCE BUSINESS AS A NON-RESIDENT
  20. 20. A U T O M A T E D DETERMINATION OF A PERMANENT ESTABLISHMENT FOR AN E-COMMERCE BUSINESS Entity is dependent on Foreign Company/Non- Resident Presence of Continuous Business in India Capacity to Contract Income is Attributable to India Fixed Virtual Galileo International and Amadeus Global Travel v DCIT (Delhi Tribunal)
  21. 21. SITUATIONS FOR A PERMANENT ESTABLISHMENT Because of the Intangible nature of transactions, the existing tests laid down for determination of Permanent Establishment does not suffice Situation 1: Business Functions are Carried out on own Website/Application  Own Server / Leased Server Operations  Website is used for conducting business operations on a large scale.  Physical Location of server will be constituted as “Fixed place of Business”  Physical Location of Server constitutes Permanent Establishment
  22. 22. SITUATIONS FOR A PERMANENT ESTABLISHMENT Situation 2 - Advertisement of Products/Services in a website or business website  Generally in the form of a Website Advertisement Banner  Mere Advertising  Server of the website does not constitute Permanent Establishment  ITO v/s Right Florists Pvt. Ltd (Kolkata Tribunal) and in the cases of Advertisement Income for Google and Yahoo Situation 3 - No physical establishment in the Host Country.  Website may constitute a Virtual Permanent Establishment  Delhi Tribunal in the cases of Galileo International and Amadeus Global Travel vs DCIT
  23. 23. WHAT HAPPENS IF IS A NON - RESIDENT AND HAVING NO PHYSICAL ESTABLISHMENTS IN INDIA? http://www.whois.com/whois/olacabs.com https://who.is/nameserver/ns-1486.awsdns-57.org/ The domain olacabs.com is used for it’s mobile app background processing.
  24. 24. LOCATION OF SERVERS (E.G. OF AMAZON WEB SERVICES) E-Commerce capitalized Cloud Computing Methods. Multiple Instances of Servers can be created and removed within few seconds at any location in the world.
  25. 25. PLANNING THE START-UP
  26. 26. ROLE OF THE ENTREPRENEUR – STRATEGIZING THE START-UP • Define the products and services • Define the Business Processes • Define the Corporate Structure • Define the Data Flows • Define Locations for servers and their roles in Business Operations • Implement a Taxation framework • Execute the Business
  27. 27. • Taxation Laws (Direct and Indirect) • Security, Privacy, IP, Customs, Excise, FDI, FEMA • Corporate Structure • E-Commerce Infrastructure Architecture • Products • Supporting Processes Business Business Architecture Local LawsInternational Laws ROLE OF THE ENTREPRENEUR – STRATEGIZING THE START-UP
  28. 28. ROLE OF A CA - TAX CONSULTANCY OBJECTIVES Characterisation of Income Identification of the existence of Permanent Establishment Tracing the start and end point of a transactionReviewing the documentation to understand the nature of the contract Removing legal difficulties of tax laws of various nations Identification the taxable jurisdiction
  29. 29. FINAL DESTINATION
  30. 30. SOURCES www.icai.org www.nishithdesai.com www.taxmann.com www.ey.com www.kpmg.com www.caclubindia.com www.rashminsanghvi.com www.oecd.org/india aws.amazon.com who.is whois.com olacabs.com
  31. 31. QUESTIONS AND THANK YOU  Bharath Rao mailme@bharathraob.com Latha Kamath simplylatha@gmail.com The information contained in this presentation is of a general nature and is not intended to address the circumstances of any particular individual or entity. The presenters disclaim any liability to any person in respect of anything as the technical contents in this presentation is solely meant for communication of information. One should act on information only with appropriate professional advice and after a thorough examination of the particular situation.

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