Introduction:
Globalization has transformed market dynamics, shifting from producer-centric to customer-centric models. Adapting to consumers' preferences is essential, necessitating the introduction of products and services accessible with a simple click. This evolution gave rise to the E-commerce industry, meeting consumers' demands with numerous options, easy returns, and doorstep delivery.
E-commerce goes beyond food and clothing; it revolutionizes how we shop, saving time and reshaping lifestyles. It's now indispensable, offering convenience to global consumers. Given its importance, regulating the e-commerce sector is crucial to safeguard both consumers and sellers' interests.
E-commerce businesses aren't exempt from legal obligations compared to offline ones. Despite misconceptions, online operations don't always mean cost savings or legal leniency. All businesses, regardless of their digital presence, face equal legal scrutiny. Challenges like navigating digital systems and linguistic diversity can hinder E-commerce. To mitigate these hurdles, adopting an Omni channel approach, blending online and offline methods, is crucial.
Understanding legal requirements enhances product selection and sales, facilitating integration into the E-commerce landscape. In India, the sector faces inefficiencies, developmental gaps, and low awareness hindering its potential.
Legal Requirements of E-commerce business in India:
E-commerce encompasses commercial activities facilitated through electronic devices. Within this realm, digital business transactions occur, either fully or partially, via the internet. As E-commerce has progressed, becoming a secure and viable method of commerce, it necessitates a robust regulatory framework to ensure accountability and safeguard consumer interests. The legal pre-requisites for initiating an E-commerce venture in India are as follows:
- Business Registration:
Every business in the form of Sole Proprietorship, Partnership, Limited Liability Partnership or Company may get its registration from the relevant provisions of law like If anyone desire to start a business in the form of company, it must be registered under the Companies Act, 2013.
When starting an E-commerce business, it's advisable to establish a company or LLP to benefit from limited liability protection and streamline business operations. Registering in this manner ensures that the bank account is in the name of the Company/LLP, simplifying the GST registration process.
Since most marketplaces allow proprietorship and partnership firms to operate on their platforms, it's recommended to conduct business through an LLP or a Company. For those planning to launch an E-commerce website, forming a Company is the most suitable option, as it is the only entity type eligible for angel funding or equity funding, crucial for a successful E-commerce venture.
- GST Registration:
Section 24 of CGST act suggests that, all the e-commerce businesses must obtain GST registration. In India, Goods and Services Tax (GST) registration is mandatory for E-commerce businesses meeting certain criteria. E-commerce operators are required to register under GST irrespective of their turnover. This means that even if the turnover of an E-commerce business falls below the threshold for mandatory GST registration for regular businesses, they are still obligated to register for GST. Furthermore, any person who supplies goods or services through E-commerce platforms is also required to register for GST, regardless of their turnover. This includes individuals selling goods or services online, even if it's on a small scale.
The purpose of mandatory GST registration for E-commerce businesses is to ensure tax compliance and streamline the taxation process for online transactions. It helps in tracking and collecting taxes effectively on the supply of goods and services facilitated through E-commerce platforms.
Failure to register for GST when required can lead to penalties and legal consequences. Therefore, it is crucial for E-commerce businesses in India to adhere to the GST registration requirements and fulfill their tax obligations to avoid any legal liabilities.
- Bank Account:
Establishing a bank account under the business name is a straight-forward process. For a Proprietorship firm, the initial step involves acquiring GST registration under the business name to proceed with opening a bank account.
- Payment Gateway:
A payment gateway is a technological tool that serves as a middleman in electronic financial transactions. It allows both offline and online businesses to accept, handle, and oversee different payment methods—like credit cards, debit cards, and digital wallets—in a secure and effective way. The payment gateway facilitates connections between the customer, the business, and their respective financial institutions. If the business operates through online marketplaces, the marketplace will process payments through their payment gateway and transfer the funds directly to the seller's bank account. Therefore, having a bank account established is necessary for seamless transactions.
- Legal Documents:
While engaging in online sales, it's crucial to protect the business and its promoters by strictly adhering to the terms and conditions and privacy policies of such platforms. For proprietary E-commerce websites, it's necessary to draft terms and conditions, disclaimers, and privacy policies tailored to the business's activities and the products sold online. For businesses operating through online marketplaces, the marketplace typically provides a sellers' agreement, which sellers must comply with. It's essential for businesses to thoroughly review these agreements before signing, as they serve as legally binding contracts between the seller and the marketplace.
Compliances for E-commerce business in India:
The situation is such that practically any service you name has an E-commerce platform delivering it to your doorstep. The rapid growth of the E-commerce sector has prompted government focus on establishing regulations and policies. India has numerous laws overseeing E-commerce businesses concerning data privacy, consumer security, transaction settlement safety, product quality, and more.
Foreign Direct Investment (FDI) refers to investments made by foreign entities into companies located in India. This can be achieved by establishing a subsidiary or associate in a foreign country, acquiring a controlling stake in an existing foreign company, or through mergers or joint ventures with foreign companies. In India, the Ministry of Commerce and Industry, along with the Department of Industrial Policy and Promotion, formulates policies regarding FDI.
There are two avenues for investing in India through FDI:
- The "Approval route" requires prior permission from the central government before making any foreign investment in a specific sector.
- The "Automated route" allows foreign entities to invest directly in Indian businesses in certain sectors without prior permission.
The FDI policy permits 100% foreign investment in the marketplace model of E-commerce through the Automatic Route. Single-brand retail trading entities operating physical stores can also engage in retail trading through E-commerce. However, some E-commerce businesses have disguised their inventory-based models as marketplace models through complex structures.
According to the Payment and Settlements Systems Act, an E-commerce business will function as a payment system if it adheres to the rules set by the Reserve Bank of India (RBI) for online transactions and payments. Additionally, it's mandatory for an intermediary receiving payments through digital methods to maintain an active Nodal Account for settling payments to sellers on its E-commerce platform.
E-commerce sellers operate similarly to physical sellers, albeit without a physical storefront. They are responsible for generating invoices, filing tax returns, paying taxes, maintaining ledgers, and keeping records—all of which are conducted online.
The Information Technology Act, 2000 (IT Act) is the main law governing internet usage, cybercrime, and digital business in India. It regulates online conduct, including aspects of E-commerce, and acknowledges electronic contracts and digital signatures.
Based on the Model Law of E-commerce by the United Nations Commission on International Trade Law (UNCITRAL), the Information Technology Act, 2000 serves as a developing legislation for E-commerce in India. It aims to regulate internet usage by penalizing individuals for disseminating obscene content, hacking, or tampering with data from other people's devices. Key features of the Act include E-contracts, transaction security, and digital signatures.
E-commerce operators must deduct 1% TDS on the gross amount of sales or services or both when crediting the amount of sale of goods, services, or both to an e-commerce participant’s account or making payment to an e-Commerce participant by any other mode, whichever is earlier.
- Double Taxation Avoidance Agreement:
Double Taxation agreements aim to eliminate the occurrence of Double Taxation in cases involving cross-border income. Nations commonly pursue these agreements to avoid scenarios where international economic activities are discouraged. In simple terms, Double Taxation occurs when the same source of income is subjected to two taxes before being converted into net income. A Double Taxation Avoidance Agreement (DTAA) is a treaty signed between two nations to promote capital investment, trade in goods and services, and other economic activities by preventing Double Taxation on international income. This means that there are agreed-upon tax rates and jurisdictions for specific types of income originating in one country and received by tax residents of another country. The issue of Double Taxation relates to the taxation of international income. Depending on the types of businesses or holdings that citizens of one country have in another, the DTAA may cover all types of income or focus on particular types of income.
The Consumer Protection (E-commerce) Rules, 2020, issued by the Ministry of Consumer Affairs, Food, and Public Distribution in India, aim to regulate and safeguard consumers in online shopping. They establish guidelines to ensure fair dealings and openness in internet transactions. Key points include:
1. Product Details: E-commerce websites must offer detailed product information, covering aspects like where it's from, who's selling it, and how returns work.
2. Complaint Resolution: E-commerce businesses must set up effective systems to handle consumer complaints swiftly.
3. Fake Goods: The rules hold online platforms more accountable for selling fake or unauthorized products, enhancing consumer protection.
4. Unfair Practices: These rules forbid dishonest tactics, such as misleading ads or unfairly influencing prices.
5. Data Protection: Protecting consumer data is emphasized, ensuring it's kept private and secure during online purchases.
6. Clarity: E-commerce sites must present clear terms and conditions, including return policies, and ensure accuracy in product descriptions.
The rapid expansion of the E-commerce sector demonstrates its crucial role in our daily lives. Gone are the days of skepticism about online shopping due to concerns about product quality, security, and delivery reliability. Nowadays, a significant portion of the population relies on E-commerce platforms for their everyday shopping needs. As a result, prepaid transactions have become more common than Cash on Delivery, indicating widespread trust in E-commerce among the public, particularly during the
COVID-19 pandemic, when E-commerce usage has surged significantly.
Given the extensive scope of the e-commerce industry, it necessitates numerous legal compliances. While many perceive online business as simpler due to seemingly fewer legal requirements compared to offline ventures, this notion is erroneous. As elucidated in the preceding article, e-commerce enterprises entail a multitude of procedures, requisites, and compliance obligations. Moreover, the legal landscape extends to encompass statutes such as the Indian Contract Act, 1872; the Indian Copyright Act, 1957; the Patents Act, 1970; issues pertaining to intellectual property; and labor laws.
Article Written by
Ayush Gupta, an Intern at Corpzo
