E-Commerce Startups: Here is what you need to know about VAT and Service Tax liability

Arguably the most exciting sector of the Indian economy is e-commerce. With more than 11.47 million broadband users (and rapidly growing), the Internet is penetrating the Indian marketplace and the consumers wallet like never before.

Businesses springing up need to be aware of the tax liability they face, and this chiefly consists of two kinds of liabilities (apart from Income tax)

a. Service Tax liability

b. VAT

Let’s begin with Service Tax

As the name suggests, service tax is a tax on service. ‘Service’ includes practically everything today, although it is recommended that you study notifications to see if your service is covered. It is scarcely imaginable that in 1994 only 3 services were taxed but today, over 114 services including many in the e-commerce space are liable to taxation.

So many services are being added that the Government has decided to bring in a negative list, such that the items on the list are not subject to taxation (and other items are), but this change is likely to be seen only in the proposed Goods and Services Tax regime.

Moving over to VAT

VAT stands for Value Added Tax and applies only to the sale of ‘Goods’. The ‘Value’ refers to the modifications made to an input before it is sold to a consumer. For example, a company dealing in textiles adds value to the cotton yarn (input) by dyeing, modifying and stitching it before selling it as a t-shirt.

It will thus pay VAT on the difference between the cost of the cotton yarn and the sale value of the T-shirt.

Tricky issues when it comes to E-Commerce

While all this sounds straightforward, some pretty complex issues may arise. For instance, if you are selling groceries online, you would be liable to VAT.

Further, if you charge a delivery fee to deliver them to your clients, you are also providing a service, i.e. the delivery of fresh fruits and vegetables to the customer’s doorstep.

Now since both these are distinct, you may end up having to pay both VAT and service tax: VAT on the sale of the groceries and service tax on the delivery of the groceries to the doorstep of the customer.

So what do I do?

You need to analyze the composite offering and see how you can avoid paying both Service Tax and VAT. A useful way would be to offer free home delivery, and add a small mark-up to the sale price of the vegetables.

While you may have to pay more VAT as a result, you can can avoid filing returns under two heads.

If you have specific queries, leave them in the comment section.

[About the author: Contributed by Hrishikesh Datar, founder of vakilsearch.com, online legal services provider (Legal Advice, Legal Documents & more.]

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