The e-cmmerce industry in India is growing at a rapid pace and shall expand to an estimated $38 billion from the present $2.3 billion in the next five years. Prominent e-commerce companies such as Flipkart, Amazon, Snapdeal and Ebay are now running entire households by providing all necessary utilities along with consumer electronics, furniture, electronic hardware, computer software, automobiles etc. Due to the rapidly expanding nature of the industry including both the increase in the amount of transactions as well as the variety of products available online, it becomes pertinent to adopt an appropriate indirect tax regime for such transactions. In the present project essay, the author shall discuss the sales tax implications on e-commerce companies.

The two prominent forms of e-commerce transactions are Business-to-Consumer (B2C) and Business-to-Business (B2B) transactions. B2B transactions include those between manufacturers and wholesalers or between wholesalers and retailers. B2B transactions comprise 90 per cent of all forms of e-commerce being conducted worldwide as reported by WTO. In fact, at the end of 2012, B2B transactions between wholesalers and distributors were worth $12.4 trillion.

On the other hand, B2C transactions involve sale or purchase of goods and services between businesses and consumers. Even though it might seem that B2C transactions are at the helm of e-commerce due to the attention they receive, they were worth $1.2 trillion only or 10 per cent of all forms of e-commerce worldwide.

Globally, two main business models determine the functionality of e-commerce. Firstly, the Market Place provides a platform for an efficient online exchange between buyers and sellers and requires commission to be paid to the e-commerce agent/dealer for such services. In this model, the manufacturers or retailers who physically own products retain such ownership and thereby directly sell the goods or services to the consumers. Here, e-commerce companies use methods such as data warehousing, data mining and analysis in order to determine consumer preferences. In such a model, the e-commerce company is discharged from the obligation of paying sales tax/VAT and is only required to pay the service tax on the commission it charges for rendering these services for sellers. The other is the Inventory Model. Herein the entity undertaking the facilitation of sale and purchase of goods and services is the owner as well. Hence, the e-commerce entity, instead of being a mere facilitator, is directly involved in the transaction as the seller.

It is now pertinent to discuss the legal position of the levy of sales tax/VAT on e-commerce in India. It is important to note that VAT is levied by the States while Central Sales Tax is levied by the Central Government. The situs of sale, which becomes significant for determining the appropriate government, depends upon the State from where the movement of the product commences. If the movement of goods terminates in some other State, it will be inter-State sale; and if the movement terminates in that State itself, it will be considered as local (intra-State) sale. In case of inter-state sales, the Central Government becomes the appropriate government and levies CST on the products. However, in case of intra-state sales, the appropriate State Government, where the situs of sale is situated, is empowered to levy VAT.

Before determining the exact legal implications of sales tax on different forms of e-commerce transactions, it is to be established that e-commerce dealers/agents do qualify under such levy. Under the different State VAT legislations as well as the CST Act, dealers are liable for the levy of VAT/CST. According to Explanation 1 of Section 2 (b) of the CST Act, which primarily defines dealer to include mercantile agents, agents for collection of payment for the goods etc, it becomes clear that for the purposes of levy of sales tax, e-commerce companies would be deemed to be dealers.

Furthermore, it is extremely pertinent for dealers to pay the sales tax/VAT to the appropriate Government. By paying it to the incorrect authority, the dealer is not absolved of his liability. The nature of levy of sales tax/VAT on an e-commerce company is essentially different from that on the clearing and forwarding (Camp;F) agent. While the former is treated as the dealer and hence gets registered under his own TIN, the latter is indeed acting for a principal and registers under the TIN of that principal.

Now that it has been established that e-commerce companies are subject to the levy of sales tax/VAT, it is essential to discuss the exact VAT/CST liability of e-commerce companies in the different models of E-commerce.


The first model deals with transactions where the ownership of the goods lies with the e-commerce companies. The company owns and stores the products, even before the consumer places an order, and receives the order via its e-portal. For example, Microsoft sells its products via its e-portal, Microsoft Store.

In such cases, the e-commerce Company is the same as the manufacturer or original seller and is treated as any other dealer. It shall have to pay the CST/VAT on the sale of the products. However, the company shall be allowed to purchase goods according to Form C and thereby claim input tax credit under the relevant State VAT Act.


In the second model, two simultaneous sale transactions are occurring. The e-commerce company, upon receipt of an online order, conveys it to the seller. The products are then sold by the seller to the e-commerce Company, which further sells them to the consumer. In the process, the seller first raises an invoice upon the e-commerce Company, which in turn, raises a fresh invoice upon the consumer. The price paid by the consumer is remitted to the seller after the e-commerce company deducts appropriate amountas commission. Such a model is prominently being used by Ebay globally.

In this case, two simultaneous sales are happening and even though the seller may directly supply the goods to the consumer, since the e-commerce Company is raising an invoice upon the consumer, it constitutes a separate sale transaction and hence they are liable to pay the appropriate CST/VAT.


In the third scenario, the e-commerce company merely provides a platform for facilitation of the transaction between sellers and end consumers without gaining any control or ownership of the products. The e-commerce company merely aids the consumer in locating the product(s) of his choice which then places an order online and informs the relevant seller. The seller supplies the products directly to the consumer by using his own means and logistics and raises an invoice upon the consumer. In case of online payment being received by the e-commerce Company, it, after retaining its commission, remits the balance amount to the seller. On the other hand, if payment is received by the supplier (cash on delivery), it remits the amount of commission to the e-commerce company.

Here, the e-commerce company is treated as a mere facilitator of the transaction(s) and not the seller. Thus, CST/VAT liability does not arise upon the e-commerce company. This is so as the concerned products remain in the custody of the seller who thereby becomes liable to pay VAT/CST to the appropriateauthority.


Under this model, the e-commerce company, in addition to being an online facilitator, provides storage and delivery facilities to the seller(s) in order to reduce delivery time and to ensure quality of service. Even though the products are dispatched and delivered by the e-commerce company, the invoice is raised in the name of the seller. The e-commerce company also undertakes the charge of collecting the payment for the products and remits the same, after deducting appropriate commission forits services. In most such cases, the warehouse of the e-commerce company is actually shown as an additional place of business of thesupplier

In such cases, the e-commerce company handles the products and proceeds, even though the invoice is raised in the name of the seller. Thus, the e-commerce company is treated as the Camp;F agent of the seller. Accordingly, the seller will be liable to obtain VAT-TIN in that State and pay VAT/CST as per the provisions of such State VAT Act. If the goods are transferred by the seller from some other State to the warehouse of the e-commerce company, such transfer will take place on the strength of Form F.

In addition to the abovementioned scenarios, certain special scenarios may also arise in the e-commerce industry which may pose challenges to the sales tax regime. One specific instance is the sale of combined or bundled goods and/or services. In such cases, what has to be seen is the main intention behind the sale. Some cases involve sale of certain primary products along with certain products for free. In such scenarios, since the intention is to promote the sale of the primary product, VAT shall be calculated on the full value of the consideration. Moreover, the sellers shall also be allowed to claim input tax credit for the free products. In certain other cases, products are being provided free with the provision of a primary service. In such cases, since the main intention is to promote the sale of service, the seller shall not be allowed to claim input tax credit on the free goods.

However, the peculiar nature of this industry has given rise to numerous issues and ambiguities for taxation.

Traditionally, businesses have been based on two factors: physical presence and physical delivery of products. The nature of the e-commerce industry is peculiar in the sense that it takes away the requirement of the first factor thereby allowing businesses to exist with minimal physical presence or no physical presence at all. This causes a lot of confusion for taxation authorities especially while determining the situs of sale. One particular instance is that of intangible goods sold online where it becomes very difficult to determine the situs of sale from the perspective of the sellers.

For example, a document reading software is jointly developed by three firms that have offices in different states. Here, it may be easy to determine the place where the product is consumed based upon the place of download; however, it becomes very difficult to determine the place from where the product has commenced its movement. Thus, there needs to be more clarity in the tax regulations with regard to taxation of intangible goods sold via e-commerce companies.

Another major issue arose in the Amazon case in Karnataka. The issue revolves around the apprehension of certain states such as Karnataka, Kerala, Uttar Pradesh and Delhi that e-commerce companies are involved in tax evasion by improper accounting and reporting. The Karnataka Government had proposed the imposition of an additional 1 per cent levy on e-commerce companies. Claiming that most e-commerce companies in the state are operating on the fulfillment centre model, the State government has said that that the levy will help keep tabs on the revenue of sellers who would be able to claim credit for the tax. The authorities feel this will ensure that disclosures are accurate and companies pay the right amount of tax. This proposal has been strongly opposed by e-commerce companies who claim to be functioning on the Market Place model and say they are mere facilitators, not actual sellers.

In conclusion, the author would discuss the possible positive effects on the e-commerce industry due to the coming of GST. Presently, a unified indirect tax regime is absent in the county with the presence of a number of taxes such as Central VAT (CENVAT), Central Sales Tax (CST), Central Excise Duty, Additional Excise Duty, Special Additional Duty of customs (SAD), Central Surcharges and Cesses, Octroi, State Sales Tax, State VAT. GST shall help in consolidating all indirect taxes in the country. Presently, when goods are sold by a state-specific network of manufacturers, dealers and distributors, they are subject to excise tax (applicable on certain goods), state specific VAT (if the transaction is intra-state) and central state tax at the buyer state (charged if the transaction is inter-state). Under current regulations excise is adjustable against further excise a manufacturer might charge from customers downstream. VAT is adjustable such that a trader, dealer or distributor pays VAT on the value add component, ie the margin on the services provided. However, Central State Tax (CST) is not adjustable and once paid, it cannot be offset by the business. Due to this last factor, intra-state sales are preferred over inter-state sales since in the former case dealers are at a tax disadvantage. This is hampering the growth of the e-commerce industry. However, if GST replaces CST the sellers would no longer have to pay unnecessary taxes in case of inter-state sales. This shall enable the e-commerce companies to operate on a more efficient Hub and Spoke Model, wherein they may establish comparatively larger hubs in certain states and smaller spokes in other states for facilitation of trade and reduction in costs.

In light of the abovementioned discussion, the author would conclude that in the absence of an industry-specific regulation, which shall go a long way in resolving the present issues, the coming of GST shall be extremely helpful in promoting the growth of the e-commerce industry by relieving these companies of the unnecessary burden of additional taxes.

(The writer is a fifth-year student of the West Bengal National University of Juridical Sciences, Kolkata.)