CA Vikram Jain
E- Commerce is all about… Growing Fast… or Dying Slow…!!
Series 1, Lesson 5:
TAXATION OF INDIAN RESIDENTS SELLING IN USA
As per Department of Treasury, Internal Revenue Services, United States of America-
“A Non- resident alien usually is subject to U.S. Income Tax only on US Source Income“.
US Source Income- for Sales of inventory – Geographical area where the goods are sold shall be considered as determining factor for US Source Income.
Inventory property is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business.
Income from the sale of inventory that you purchased is sourced where the property is sold.
Generally, this is where title to the property passes to the buyer.
For example, income from the sale of inventory in the United States is U.S. source income, whether you purchased it in the United States or in a foreign country.
Income from the sale of inventory property that you produced in the United States and sold outside the United States (or vice versa) is partly from sources in the United States and partly from sources outside the United States.
These rules apply even if your tax home is not in the United States.
Conclusion- This means, if you are a non-resident in USA and sell goods in geographical territories in USA, you shall be liable to pay Income Tax in USA.
Financial Year in USA ends on- 31st December.
Due date for filing Income Tax Return in USA- within 105 days from end of Financial year i.e. 15th April of next year.
Eg.: For FY 01.01.2015 to 31.12.2015, due date for filing income tax return shall be 15.04.2016.
Important Note: As per Double Tax Avoidance Agreement (DTAA) between USA & India, if you pay tax in USA, you can claim benefit of the tax paid in USA while filing your Income Tax Return in India.
Non- compliance to Income Tax laws in USA-
Intentional non- compliance to USA Income Tax laws is considered as “TAX EVASION” which is considered as an act liable for Criminal prosecution in USA.
Most of the e-Commerce Sellers wish to comply with laws of the land where they trade in business. Also, with professional help, they can buy mental peace and concentrate on the core business activities of exports, exploring new market places, etc.
However, due to non- availability of professional help they send goods as free samples, gifts, etc. which is against the laws.
Also, they cannot claim export benefits, incentives, drawbacks, etc. and end up in non-compliance which may cause serious business injuries at a later stage.
Benefits of exporting goods in an organized manner-
COMPARATIVE ANALYSIS: Export of Goods to USA through official channel
Export of Goods to USA as Sample/ Free gift
- Foreign Exchange Management Act 1999
(a). Selling through official channel- Complied with.
(b). Supplying goods as free sample/ gift- Annual maximum limit for supply of free gifts under FEMA is Rs. 1.00 Lakhs. If goods are supplied as free gift above the prescribed limit, it shall be deemed to be contravention of FEMA and shall be considered as civil/ criminal offence.
- Foreign Inward Remittance Certificate (FIRC)
(a). Selling through official channel- FIRC (for payment received in foreign currency) is closed on receipt of export proceeds and RBI guidelines are complied with.
(b). Supplying goods as free sample/ gift- RBI/ FEMA guidelines can’t be complied with against goods sent as free gift.
- Indian Income Tax Act, 1961
(a). Selling through official channel- For turnover upto Rs. 2.00 Crore – Assessee has to declare net profit @ 8% (No audit required). For turnover above Rs. 2.00 Crore– Audit under Section 44AB is to be conducted and Tax Audit Report to be obtained in Form 3CA/ 3CB & Form 3CD.
(b). Supplying goods as free sample/ gift- No proper financial books of accounts can be made available for audit. No Tax Audit Report can be issued as goods are supplied as free sample.
- Refund of Excise Duty
a). Selling through official channel- Excise duty is levied @ 12.50% by the manufacturer. The same is- waived off or refundable in full, for export of goods through official channel which results in decrease in cost of purchase.
(b). Supplying goods as free sample/ gift- No refund of Excise duty is available for goods sent as free samples/ gifts.
- Refund of Local Sales Tax
(a). Selling through official channel- Local Sales Tax (nearly 14%) is waived in full for export of goods against Form H- for exports- through official channel which results in decrease in cost of purchase.
(b). Supplying goods as free sample/ gift- No refund of Sales tax is available for goods sent as free samples/ gifts.
- Refund of Service Tax
(a). Selling through official channel- Service Tax @ 15% is levied on freight, transportation, insurance, currency conversion charges, Custom House Agency charges, etc. The same are refundable in full – for exports- through official channel which results in decrease in cost of purchase.
(b). Supplying goods as free sample/ gift- No refund of Service tax is available for goods sent as free samples/ gifts.
- Export incentive
(a). Selling through official channel- Export incentives are available on goods exported through official channel @ 2% to 5% on FOB value of goods exported various products.
(b). Supplying goods as free sample/ gift- No such incentive is available for goods sent as free samples/ gifts.
- Credit facilities
(a). Selling through official channel- Bank Loan/ Credit limits @ 6-7% per annum for exporters exporting goods through official channel.
(b). Supplying goods as free sample/ gift- No such credit limit is available.
You may hire a professional consultant who can guide you in a systematic manner for growth in your exports business.
Author: CA Vikram Jain