Digital India: Emerging E-Commerce Sector and Taxation Under Prevailing Regulatory Framework

Digital India: Emerging E-Commerce Sector and Taxation Under Prevailing Regulatory Framework

Amit Kumar Sinha (Amity University, India)
Copyright: © 2018 |Pages: 15
DOI: 10.4018/978-1-5225-3787-8.ch011

Abstract

E-commerce and internet businesses are driving the rapid growth of the domestic IT-ITeS industry, attracting unprecedented global interest and funding. Indian e-commerce and internet companies are growing rapidly with about 460 million internet users and a tele-density of around 85.2%. Increasing penetration of the internet, adoption of smartphones and minimal effort low-cost mobile devices, changing demographics, mobile-empowered youth, and the emergence of tier 2 and tier 3 cities as major shopping hubs have been driving the growth of the industry, with new retail forces shifting its dynamics. Furthermore, the continued growth of large pure-play organisations that are powerhouses has moved retailers' focus to the web channel. These companies are not only becoming gateways to product research, but have also introduced consumers to new ways of viewing the retail process.
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Introduction

Improved access to the Internet has immense implications for the economy and society in general. The tremendous growth of the World Wide Web (web) has transformed the Internet into a formidable medium for commerce and information exchange. The web has made time-consuming and tedious tasks, such as retailing, academic research, submitting job applications, and communicating, relatively simple and efficient. Shopping for goods and services can be done from the comfort of the living room. Prices can be compared from around the corner to around the world. Some researchers estimate that the volume of Internet sales will exceed catalogue sales within a few years.

The number of mobile internet users in India is estimated to reach around 420 million by June 2017 with the rural India growing at a much higher rate than urban India says a published by Internet and Mobile Association of India (IAMAI) & market research firm IMRB. According to a report titled Mobile Internet in India 2016, there were 389 million mobile internet users in India as on December 2016.

E-commerce and internet businesses are driving the rapid growth of the domestic IT-ITeS industry, attracting unprecedented global interest and funding. Indian e-commerce and internet companies are growing rapidly with about 460 million internet users and a tele-density of around 85%.2 Increasing penetration of the internet, adoption of smartphones and minimal effort low-cost mobile devices, changing demographics, mobile-empowered youth and the emergence of tier 2 and tier 3 cities as major shopping hubs have been driving the growth of the industry, with new retail forces shifting its dynamics. Furthermore, the continued growth of large pure-play organisations that are powerhouses have moved retailers’ focus to the web channel. These companies are not only becoming gateways to product research, but have also introduced consumers to new ways of viewing the retail process.

However, the transition of retail sales from the offline to the online mode—a multi-trillion dollar opportunity—is still in its early innings in India and there is significant opportunity for further growth. Continued refinement of technology, the addition of new analytics capabilities and rolling out of same-day delivery are key drivers that could accelerate the growth of the segment.

Internet commerce and associated revenues have gained the attention of policy makers around the world. eCommerce and Internet businesses in India are slotted in two broad categories–based in India and operating outside India. Since the taxation system in India is source-based, i.e., the physical presence of an entity is required for a transaction to be taxable in India, the real test lies in bringing transactions conducted in the digital environment within the tax net. In order to address this, the Organisation for Economic Co-operation and Development (OECD) has constituted a committee to review digital transactions and formulated suitable measures to avoid tax leakages. The committee has suggested the implementation of the BEPS Action plans, which recommend ways of taxing transactions in the digital economy. Accordingly, the Government of India has introduced various measures such as the Equalisation Levy (at the rate of 6%) and enlargement of the scope of Service Tax (at the rate of 15%) to bring digital supplies under the ambit of these taxes. This has increased compliance-related requirements in business functions. However, since this concept is new in India, the authorities and business drivers are expected to witness controversies in the future.

In this chapter author has attempted to showcase the various Direct Tax-, Indirect Tax-, Transfer Pricing- and Regulatory-related challenges eCommerce and internet businesses face, and the key areas on which they should focus. To incorporate a focused approach in our analysis, we have limited our coverage of businesses to five major business segments in the eCommerce and Internet sector—Over-the-Top (OTT), Online Advertising, eTail and Marketplace, Digital Payments and Cloud.

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