With a focus on online merchants based in Singapore and India
Ecommerce scores over traditional brick and mortar outlets on many fronts like being able to reach out to a huge audience, operating 24/7 and saving on operational costs of expensive real estate and sales staff. However, one aspect that is unavoidable, and both physical stores and online businesses need to pay for is…. Tax.
No matter if you are a new entrant to this trade or have been operating an online store for a while, every business has a mandatory tax obligation to the government.
There are broadly two kinds of taxes that every business has to pay. One is the Corporate Income tax that is to be paid by the company based on the net profits made over the financial year. The other is the Goods and Services Tax (GST) that is a consumption tax and is actually paid by the customers and collected by the merchants. This tax revenue is then reported and remitted to the government either quarterly or annually.
Taxation matters are complicated and country-specific or even state-specific (within the country) and therefore often need expert professional handling. This is just an endeavour to familiarise online merchants with the various aspects of taxation matters and an attempt to make your life somewhat easier.
A Few Tax Issues to Keep in Mind
- As an entrepreneur there are many different aspects of the business that need your time and attention. Let tax filing not be one of them. All it needs is a bit of organization. Every merchant needs to be up to date with his financial accounts and sales records so that when it comes to tax time, the consolidation process is not too complicated.
- The way your company has been set up will also have an impact on your taxation. As a freelancer or a sole proprietor, income earned from your business could just be declared as a part of your personal income tax filing. But once you have a Company, taxes need to be filed separately and any business income would then be taxed at the corporate tax rate.
- Every tax paying entrepreneur can legally prepare all the relevant documentation and file their taxes with the authorities. In Singapore, taxes need to be filed with the Inland Revenue Authority of Singapore (IRAS) while the Income Tax Department (ITD) is the relevant authority in India.
- However, sometimes with growth in business transactions and investments across states or even across countries, complications in tax computations can arise that are best handled by professional tax accountants.
- All online sellers, whether selling at their own websites or through marketplaces like Amazon and Lazada have to report their revenues and income to the relevant government authority and file their income tax returns annually.
- Setting up and running a business involves various costs that could be deducted as expenses from your tax bill. Apart from the more obvious office expenses like phone, utility and internet bills, such exemptions could also cover costs of professional courses to enhance your skills and professional fees paid to lawyers and accountants by your company.
- Understanding your tax obligations is important as non compliance could lead to fines and penalties. Moreover, tax laws keep on changing and that can make it difficult for small businesses. It is important to keep track of Tax deadlines and be compliant.
Although the above mentioned basic premise remains the same everywhere, taxation rates, policies and even financial accounting periods are diverse and hence warrant country specific attention. Here we highlight the basic taxes payable by online merchants in Singapore and India.
The tax regime in Singapore is known to be liberal, providing many incentives especially for new business owners. Like most other places, there are two major tax obligations that apply to ecommerce firms in Singapore – Income Tax and GST.
The current rate of GST is 7% and is compulsory for all companies with an annual turnover of S$1mn. The medium through which the transaction occurs does not alter the taxability of the transaction in Singapore. GST is applied on the selling price of all goods and services consumed. Exports are exempted from GST.
Profits derived from business operations of a company in Singapore can be taxed at the rate of 17% by the IRAS. However, the effective tax rate is often much lower due to the various tax incentives and tax exemptions available to Singapore resident companies. Singapore follows a territorial basis of taxation, i.e. taxation is based on whether the e-merchant is operating and deriving profits in Singapore or at another location which then would need to be accounted for differently (to avoid double taxation).
All businesses, whether online or physical, are obliged to pay corporate income tax based on the profits earned from their business. The effective rate of corporate tax (including surcharges) varies between 22% to 30% for most companies depending on the nature of their business, the duration since incorporation and such other factors.
The Goods and Services Tax (GST) ranging between 5% and 28% (depending on the nature of the goods) was introduced throughout India in July 2017 in an attempt to replace and consolidate various indirect taxes (like Value Added Tax, Central Sales Tax, Excise Duty and Commercial Tax among others). Currently all services are taxed at 18% GST.
Any business whose turnover exceeds INR 40 lakh (for goods) and INR 20 lakh (for service provider) is required to register under GST. However, in reality, for efficiency and tax compliance purposes, it is recommended that every ecommerce business be compulsorily registered without any threshold exemption limit.
As an online merchant selling to customers directly through your website you could use standard GST filing based on the nature of your product.
On the other hand, if you are selling through an aggregator like Flipkart or Amazon it is different. Here the aggregator collects a tax of 1 % at source before sending the payment back to the seller. This amount is then paid to the government while the seller can claim the tax as a deduction on their own GST filings.
The Key Takeaways
- Online businesses need to be registered and are liable to pay Income Taxes (on their profits) and GST (collected from the customer) to the government.
- Organization is the key. All transactions – be it sales or expenses should be recorded and maintained to enable efficient consolidation and computation of tax liabilities either by yourself or your professional tax consultant.
- Tax obligations are unavoidable and it is recommended that you file your taxes in time to avoid unnecessary penalties.