What are “affiliate marketing services” and what are its tax implications?

Affiliate marketing as a new marketing strategy | by Paula Maričić |  Digital Reflections | Medium

E-Commerce Business is witnessing resurgence in India due to increasing penetration of internet use base in Tier-II and Tier-III cities eliminating visit to physical market.

Some of major Participants are Amazon, Flipkart, Myntra, Grofers, Zomato, Swiggy.

  1. E-Commerce Operator- Who arranges the Internet Portal for sale of goods or services like Amazon
  2. E-Commerce Participants- Who actually sells the goods or services to customers via connecting with E-Commerce Operators like any particular vendor registers with Amazon
  3. Customers- who buys the goods or services from the internet portal of E- commerce Operators

A major question which arises over here is how the MARKETING is done in the world of E-Commerce Business?  Here comes the role AFFILIATES.

The E-Commerce Operators connects with these AFFILIATES who with their promotional tactics arranges for sale of goods or services. These Promotion acts are being done by affiliates in many ways such as writing blogs on any particular product or service, making any product or service attractive via pictorial presentation, uploading promotion videos on You Tube or other social networks over internet, etc. There can be many ways, an affiliate can drive online sale of any product of services.

Every time a sale is made by the E-Commerce Operators on the basis of promotions made by any Affiliate, such Affiliate gets COMMISSION income for each such sale on the basis of predefined terms between them.  Affiliates may also incur some expenses such as Google Advertisements to create traffic on his blog or website or You Tube Page, Professionals to write a blog or doing research, etc.

In this Article we will deal with the taxation impact on the commission income in the hand of these Affiliates.

Income Tax

  1. Profit and Gain from Business & Profession (PGBP)

The activity of providing Affiliate Marketing Service can be said to be a business activity considering which the income will be assessed under the head ‘PGBP’ under the Income Tax Act, 1961 (hereinafter referred to as the Act). On doing so, all the related expenditure can be claimed as business expense in computing the total taxable income under this head.

For Example:

Sl. No.

Particulars

Amount (Rs.)

1.

Total Commission Income received during the year

25,00,000/-

2.

Less: Expense of Google Ads

5,00,000/-

3.

Less: Other Expense

100,000/-

4.

Income from PGBP

19,00,000/-

 

  1. Presumptive Taxation u/s 44AD of the Act

As per Section 44AD of the Act, if the gross receipt of any Individual/HUF/Partnership firm (excluding LLP) whose total turnover or gross receipts in the previous year is upto Rs. 2 crores, then he has the option to go for presumptive taxation scheme wherein flat income chargeable to tax  is @ 8% of  Gross Receipts.

However, the above option is not applicable for Income in the nature of Commission, hence, this benefit cannot be taken on commission income of Affiliates.

  1. Advance Tax

As per Section 208 of the Act, every person whose estimated tax liability for the year is Rs.10,000/- or more, shall pay his tax in advance, in the form of “advance tax”.

However, as per the provision of Section 234C of the Act wherein the interest is leviable for deferment of payment of advance tax, no interest shall be leviable for shortfall in payment of advance tax, if the income under the head ‘PGBP’ is taxable for the first time.

However, interest under Section 234B of the Act is applicable from the 1st day of April of the next year if the amount of advance tax paid is less than 90% of the assessed tax.

Therefore, the Affiliates have to analyze the taxable income at regular intervals, so that an estimation of tax liability is computed and thereby advance tax may be deposited, if any, to avoid interest.

  1. Requirement of Audit of Accounts

As per Section 44AB of the Act, if the total sales or turnover or gross receipt from business exceeds Rs. 1 Crore in a year, then that person is required to get his accounts audited by a Chartered Accountant as per the prescribed provisions.

Therefore, if commission income exceeds Rs. 1 crore in a year, they have to go for Tax Audit by a Chartered Accountant.

  1. Tax deduction at Source (TDS)

Marketing Service taken from Google attracts TDS deduction under Section 194C of the Income Tax Act, 1961. The following points have to be kept in mind by while paying to the Google:

  1. TDS to be deducted @2%
  2. No TDS shall be deducted if one-time payment does not exceed Rs.30,000/- and total payment during the entire year is estimated up-to Rs.1,00,000/- only.

Also, no TDS is required to be deducted in case of Individual/HUF, if no tax audit was conducted in the preceding year. Likewise, if business is registered as a company or partnership firm they have to compulsorily deduct TDS on expenses.

Google Advertisement expense is just an example. The applicability of TDS on other expenses incurred by Affiliates, has to be analyzed for each expenses specifically.

Therefore, applicability of TDS is another important law.

 Double Taxation Benefit in India

If Commission is income is being received from E-Commerce Operators located Outside, then withholding tax as per laws of foreign countries may be deducted from commission income by such E-Commerce Operators.

Then in such a case the Affiliate may get the benefit of lower tax or no tax or deduction of such withholding tax deducted, depending upon Double Taxation Avoidance Agreement entered into with the particular country and India.

Therefore, claiming of tax benefit in terms of Double Taxation Avoidance Agreement is another important factor so as to avoid paying tax twice on similar income.

Equalization Levy

Also, deduction of tax in form of Equalization Levy is applicable if payment is made to a non-resident service provider for online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and the annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.

For example advertisement service is taken from Google located outside India, a deduction has to be made from its payment as equalization levy @ 6%.

We will deal with this part in detail, in a separate article soon.

GST

Generally as per Section 22 of the CGST Act, 2017 (hereinafter referred to as CGST Act), person is liable to take registration under the GST if his aggregate turnover in a F.Y exceeds Rs.20,00,000/-.

However Section 24 of the CGST Act requires compulsory registration under GST irrespective of amount of aggregate turnover for the persons specified therein. Such person also includes the following:

(i) persons making any inter-State taxable supply;

(vii)persons who make taxable supply of goods or services or both on behalf of other taxable persons whether as an agent or otherwise;

In respect of clause (vii) referred above, if any person is acting only as procurement agent and bill to actual customers (i.e. the person who buys the goods) is not issued by the agent in his name and in actual the bill to customer is issued by the principle only, then the procurement agent is not covered under the category of ‘person making supply on behalf of other taxable person’.

Likewise, in the case of Affiliate Marketing Service, bill to actual buyer of goods or service is given by E-Commerce Operators only in their name and the Affiliates has no role in between those parties and is only acting as a procuring agent. Therefore, the Affiliates are not covered under clause (vii) referred to herein above for taking compulsory registration under GST.

Coming to clause (i) referred to herein above for compulsory registration i.e. “inter-State taxable supply”. Section 7 of the IGST Act defines the terms “Inter-State Supply” wherein sub section (3) provides that in case of supply of service where the ‘location of supplier’ and the ‘place of supply’ is in two different state, or union territory, then it shall be considered as inter-state supply of service.

Location of supplier

If the Affiliates are located in India, location of supplier is India.

Place of Supply

For determining the place of supply, it is important to understand the specific nature of Affiliate Marketing Service.

Section 2(17) of the IGST Act, defines the extract “online information and database access or retrieval services” as “services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as,––

(i) advertising on the internet; (ii) providing cloud services; (iii) provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet;( iv) providing data or information, retrievable or otherwise, to any person in electronic form through a computer network; (v) online supplies of digital content (movies, television shows, music and the like); (vi) digital data storage; and (vii) online gaming;

Thus, when any service is (i) delivered through internet/information technology, (ii) supply essentially is automated with minimal human intervention and (iii) impossible to ensure in the absence of information technology, then the said service may be termed as ‘online information and database access or retrieval service’.

In the case of the Affiliate Marketing Service also, the following factors are present:

  1. delivery of affiliate marketing service is mediated through internet and information technology only,
  2. Since the commission income earned by the Affiliates is only marketing over internet making the sale on E-Commerce Operator’s Site, it can be said that supply of such service is automated and involves less human intervention,
  3. It is also clear that providing this kind of marketing service is impossible without information technology

Also, it is clarified that even it includes advertisement service, if comprising above said natures.

Therefore, in the light of the above analysis it is clear that Affiliate Marketing service will come under the head of ‘online information and database access or retrieval service’.

Further, it may be noted that Section 13 of the IGST Act provides specifically for ‘Place of supply of services where location of supplier or location of recipient is outside India’ and since in the instant case also the location of service recipient i.e. Amazon is outside India, for determining the place of supply the said section 13 shall be applicable.

Subsection (12) of the above said Section 13 provides that “the place of supply of online information and database access or retrieval services shall be the location of the recipient of services”.

Therefore, the location of E-Commerce Operator is of utmost importance to determine place of Supply as follows:

Location of E-Commerce Operator

Place of Supply

If located outside India

Outside India

If located in India

In India

 

Depending upon Place of Supply the following, it shall be determined whether it export of service or not as follows:

Place of Supply

Export or Not

If determined outside India

It is export of service

If determined in India

It is not export of service

 

GST if not an export of Service

Registration is only required if commission receipt exceeds Rs. 20,00,000/- in a year and thereafter regular monthly/quarterly/annual compliance is required to be done.

GST in case of export of Service

It is clear that since the location of service recipient is India and Place of supply is outside India, it will be coming under the category of ‘inter-state supply’.

Therefore, in view of the provision of compulsory registration under clause (i) of section 24 of the CGST Act referred to herein above, irrespective of the amount of aggregate turnover.

No GST on export of service

Section 2(6) of IGST Act 2017 defines Export of Services as the supply of any service when, location of supplier is India and recipient is outside India, place of supply is outside India, for consideration is received in convertible foreign exchange and the supplier of service and the recipient of service are not merely establishments of a distinct person.

Further, it may be noted that export of service is considered as ‘zero rated supply’ in terms of Section 16(1)(a) of IGST Act.

Therefore, as per law no GST is applicable for export of service.

Procedure for GST free Export of Service

Since the GST on export of service is zero rated supply, in term of section 16(3) of the IGST Act, it can be done in either of two ways:

  1. Export of Service with payment of IGST- Under this method the Affiliates can export by paying GST by his own pocket and thereafter can claim refund of GST paid by claiming it as zero rated supply according to provisions of section 54(3) of the CGST Act.
  2. Export of service without payment of IGST- Under this method the Affiliates is required to take a letter of undertaking (LUT) before supply of service and by furnishing export of service can be made without payment of IGST.

Refund of GST paid on Inward Supply (i.e. Expenses)

Further, it may also be noted that where the export is made without payment of GST through LUT, then the Affiliates can also claim the refund of GST paid on inward supplies.

Example- GST on Google Bills that he would not be able to set off, when export is opted to do through LUT i.e. without payment of any GST, then those unutilized GST can be claimed as refund u/s 54 of the CGST within the period of 2 years of from the date of receipt of consideration from Amazon in foreign convertible exchange or date of invoice in case of advance receipt.

Regular Compliance

Various monthly/quarterly/annual GST Returns is required to be filled on timely basis after taking registration

THIS ARTICLE IS ONLY PHASE I ON TAXATION IN THE WORLD E-COMMERCE BUSINESS. WE WILL BE COMING WITH MORE, COVERING OTHER TAXATION ASPECTS INCLUDING CLARIFICATION ON EQUALIZATION LEVY

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