Transactions done through internet as medium are known as e-commerce. This medium of transmission has made possible international transmission of services that was not possible earlier by the existing modes of transmission, that is, television, fax and phone.
E-commerce market which involves dealing with the buying and selling of goods and services, or the transmitting of funds or data, over an electronic platform, mainly the internet, is likely to grow ten-fold in next five years to reach $100 billion on the back of increasing penetration of internet, smart phones and spread of digital network in rural areas, says a study. In 2013, retail e-commerce sales amounted to 3.59 billion US dollars and are projected to grow to 17.52 billion US dollars in 2018.
There are currently six different mediums of e-commerce: telephone, fax, television, electronic payment and money transfer systems, Electronic Data Interchange (EDI) and Internet. PayPal, online bill pay, and mobile payments are all examples of recent electronic payment advancements. Electronic Data Interchange is where there are no documents or people involved. It is one of the important medium as by moving from a paper-based exchange of business document to one that is electronic, businesses enjoy major benefits such as reduced cost, increased processing speed, reduced errors and improved relationships with business partners. Today, electronic funds transfer allows you to exchange funds between individuals as well as organizations via electronic gateways which can be accessed using internet, computers and smart phones. Moreover, funds can be transferred instantly from one account to another, either within the same bank or to a different bank network at any given time.
Basically, e-commerce involves four kinds of business transactions. These business transactions are categorized into either:
- Business-to-Business (B2B): In this kind of transaction, companies are intermediaries between other companies that buy and sell goods and services. Such as transaction between manufacturers and wholesalers or retailer and wholesalers.
- Business-to-Consumer (B2C): This kind of transaction is conducted directly between a company and a consumer. For example, purchase of a headset from amazon.com. In 2012, the average B2C e-commerce sales per digital buyer in Indiaamounted to 632 U.S. dollars, up from 597 U.S. dollars a year earlier. This figure is expected to increase in the future and reach 724 U.S. dollars in 2016.
- Consumer-to-Consumer (C2C): In this model, people come together to buy, sell or trade items online by directly interacting with each other. For example e-bay is one of the top websites in the world today and provides services for classified ads. Moreover, consumers can also conduct other transactions such as housing and job searches. Such websites generally take revenue which comes from fee charged to users who post the items for sale or auction. E-Bay’s audience stretches over most of the worldand drew over 84 million US visitors in the beginning of 2014.
- Consumer to Business (C2B): It is the most recent e-commerce business model. C2B business models include reverse auctions, in which customers name the price for a product or service they wish to buy. For example, Elancewas one of the first web sites to offer this type of transactions. It allows sellers to advertise their skills and prospective buyers to advertise projects. This business model is the opposite of the traditional B2C mode.
- Business-to-Business-to-Consumer (B2B2C): This kind of transaction basically combines business to business transaction and business to consumer transaction for a complete product or service transaction. For example, Business X pays Business Y for all its users or sales being generated by Business Y’s business. Now, business X uses business Y’s channels to locate the prospective customers. Business Y provides its customers with relevant services and earns revenue for sold products and services.
Moreover, nowadays, e-commerce email Marketing is considered to be one of the most favored medium for the e-commerce marker experts across the globe. It was observed that 13 of the biggest e-commerce companies in India send on an average 6 emails per week to each customer. While Bluestone, Lenskart, and Snapdeal send around 3 emails per week, Jabong and Pepperfry send 12 and 11 emails per week, respectively. Flipkart, the biggest name in the industry send 9 emails in a week. Since Return on Investment from email is extremely high, about $40 for every $1 spent on emails (Direct Marketing Association), hence marketers are willing to spend more and more on emails. E-Travel is the most popular form of e-Commerce and comprises almost 61% of the total e-commerce market, followed by e-Tail which essentially means selling of retail goods on the internet conducted by the B2C category. E-tailing grew by 1.4 times since 2013 taking up almost 29% of the e-commerce market share in India.
- Taxability of e-commerce under Service Tax
Service tax is the tax which is levied by the government on service providers on certain service transactions, but is borne by the customers. It was first included under the Finance Act, 1994. It was imposed on an initial set of three services in the year 1994 and the scope of the service tax has been expanding since, continuously by the subsequent Finance Acts.
It is an indirect tax as it is recovered from the service receiver by the service provider in course of the business transactions. However, in the case of All India Federation of Tax Practitioners V/s. Union of India (2007), it was stated that in the case of internet service provider, service tax is leviable for online information and database provided by websites. But no service tax is leviable on e-commerce as there is no database access.
Vide Entry 97 of Schedule VII of the Constitution of India, the Central Government levies service tax according to Chapter V of the Finance Act, 1994.
Service Tax Rate is decided for each financial year. In the Financial Budget of 2015, it was increased from 12.36% to flat 14%. Moreover, Swachh Bharat Cess at the rate of 0.5 % was also made applicable from November 15, 2015. Therefore the effective rate of Service Tax has been increased to 14.5% with effect from November 15, 2015.
Service Tax is charged to the individual service providers on cash basis, and to companies on accrual basis. It is same for all the states except for Jammu & Kashmir, unlike VAT (Value Added Tax) as service tax is charged by central government and VAT by state government. The rates of service tax may vary depending upon the services rendered but would be the same for all the states.
There are many e-portal websites which are available to promote the business of rendering services on behalf of service provider. Various such service models are mentioned below:
A) Services rendered by online portals (like Makemytrip, etc) to the customer :In case of services being provided with the help of intermediaries, that is, Online Aggregator, service tax shall be levied on the bill raised by the Service Provider to the customer. Online Aggregator or intermediary is the one to raise the bill towards service provider and service tax is to be levied on the same.
B) Direct rendering of services from Service Provider to the customer: If services are being provided online, then service provider shall be liable to charge service tax from the customer. For example, in case of online repairing of computer being provided by a company, service tax shall be charged by the company from the customer.
C) Service provided from Customer to Customer: These are the services which are mainly provided by online auctions, such asEbay, where an individual can list an item for sale and other individuals can bid to purchase it. These sites which act purely as intermediaries, normally charge commission to the sellers using them. They have little control over the quality of the products being offered, although they do try to prevent the sale of illegal goods, such as pirate CDs. Major online retailers like Amazon also allow the customers to sell products via their sites. Etsy, eBay, Craigslist, Taobao, Amazon, and Kickstarter all offer functions to enable C2C transactions and interactions.
D) Crowdfunding Websites: Itis the practice of funding a project by raising monetary contributions from a large number of people, generally via the internet. Platforms like pikaventure.com, Indiegogo.com and many others are helping entrepreneurs to raise capital for their project and in turn they charge minimum fees for raising such amount if target funding is achieved. Amount of fee to be charged shall be liable for service tax.
The most basic form of sale via internet is where companies offer a platform where the buyer meets the seller on the website. In such transactions, the e-commerce companies pay service tax on the commission that it has collected for the services provided to the customers. Hence, there is no question of sales tax or value added tax (VAT) in such a transaction.
Taxability of e-commerce under VAT
VAT stands for value added tax and here, ‘value added’ is the difference between sale and purchase of a business. It is a multistage tax levied on the value added at each stage of sale and is equivalent to last point sales tax. It is a State subject and is included under Entry 54 of the State List, for which States have the sole power to take decisions. Taxation departments of different State Governments are carrying out the responsibility of levying and collecting VAT in their respective territories. Central Government only serves as the facilitator for the successful implementation of VAT. The Ministry of Finance is the main agency for the implementation and levying of VAT, both at the Centre and the State level.
VAT is a multi-stage destination based of taxation, as with value addition at each stage of transaction, tax is levied. It is a tax on the final consumption of goods or services and is ultimately borne by the consumer.  It was stated by the Supreme Court in the case of All India Federation of Tax Practitioners V/s. Union of India (2007), that Service Tax is a value added tax which is levied on the value addition which is made as a result of rendition of a service. 
It seeks to help the common people, traders as well as the Government by rationalizing overall tax burden and causing reduction in the general price level. Hence, it is a move towards a more efficient system of taxation with equal competition and fairness.
At the Central level, there is Central Value Added Tax (CENVAT) which pertains to the rationalization of Central excise duty structure in India. It is a tax which is levied on the production or manufacture of marketable and movable goods in India. The current standard CENVAT rate is 12.36%. There are lower rates of 0% and 4%. There is also a higher rate of 27% on luxury items. The CENVAT scheme is regulated by Rules 57AA to 57AK of the CENVAT Credit Rules, 2004, and the notifications issued thereunder, the Central Excise Rules, 2002 (Section 143 of the Finance Act, 2002)
Since VAT differs from State to State unlike Service tax, at the State level, the Committees of State Finance Ministers have proposed and finalized a design of VAT which is to be adopted by all the States and Union Territories. This basic design of VAT basically retains the essential features of VAT and keeps them common for all the State and the Union Territories, like, rates of VAT on certain commodities are kept uniform for all of them.
It has been contended by several States that online portals like Flipkart, Amazon and Snapdeal should be treated like conventional retailers and hence, should be liable to pay tax on sales taking place through their websites, without disadvantaging states where the end-consumer is located.
Moreover, arguing that conventional retailers can’t be deprived of a level-playing field, some states like Kerala have said that either e-tailers must set up warehouses in their states for sales to local consumers and pay VAT or pay a higher tax on sales to their consumers from warehouses in other states. 
A dispute had arisen in case of e-commerce companies that undertake storage of goods in their warehouse, procured from sellers before dispatching them to the respective buyers. It was observed that Karnataka VAT authorities were of the view that in such cases, since e-commerce companies are involved in supplying and distribution of goods, they would qualify as ‘dealers’ as they act as commission agents of sellers. Therefore, these e-commerce companies are covered under the definition of ‘dealers’ and, therefore, are liable to discharge VAT.
The main issue is that in case of e-commerce companies that undertake storage of goods procured from various sellers in their warehouse before dispatching them to the respective buyers. It appears that Karnataka VAT authorities are of the view that in such cases, the e-commerce companies are involved in supplying and distribution of goods and, therefore, would qualify as ‘dealers’. The authorities are also of the view that these companies act as commission agents or consignment agents of sellers. Therefore, these companies are covered under the definition of ‘dealers’ and, therefore, are liable to discharge VAT.
Sources have said that “Madhya Pradesh wants clarity on when an online sale can be deemed to have taken place to avoid disputes. While Kerala wants a tax regime that would not discourage consumers in the state to buy from traditional traders within the state, Karnataka is planning to amend its VAT Act so that e-commerce firms levy VAT on sales on their platforms and pay to the state government, rather than passing the buck to third party merchants.”
Since there is no uniform rate of VAT for the State and the Union Territories, questions regarding jurisdiction and definition of permanent establishment often arises in the context of borderless world of the internet. In order for e-commerce to thrive in this industry, and for the taxation of the same, an in-depth understanding of the legal regime and the various issues that e-commerce business would face has been the need of the hour.
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 Ibid 2, pg 1.
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 Ibid 12, pg. 3.
(2007) 7 SCC 527.
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 Ibid 29, pg. 7.
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