Tax Implications on Drop-shipping business in IndiaAbhinandan Sethia
Drop-shipping is a type of business where the products to be sold are not kept in the store, rather in the drop-shipping model, the products are purchased from the third party and are directly shipped to the customer. As a result, the seller does not have to handle the product directly.
The difference between standard retailing and drop-shipping is that the selling merchant does not stock the inventory, instead, he purchases the products from the third party (wholesaler or manufacturer) to fulfill the orders.
What is International drop-shipping?
International drop-shipping is where the customers and the suppliers are both based outside of India. For example, the target customers are based in USA and goods are supplied by suppliers based in China.
So, a person in India take orders from the customers who are based outside of India and then passes those orders to suppliers who are also based outside of India. These suppliers fulfill the order and get paid by the person in India.
A. GST Implication on International drop-shipping
I. Is GST registration applicable on International drop-shipping ?
There are two legs of a typical drop-shipping transaction:
- You will receive an order from a customer outside of India, which will be forwarded by you to a supplier outside of India, who will get the product delivered to the customer.
- You are essentially providing customer forwarding/lead generation services to the supplier who is delivering the product to the customer.
For the first leg, since the goods are being delivered from a supplier outside India to a consumer outside India. This is neither an Export from India nor an Import into India and hence this is out of the ambit of GST.
For the second leg, it’s an export of services from a person who is based in India to a person based out of India.
GST law do not require a business to get registered under GST if it is exclusively engaged in export of goods or services. so legally speaking, if you are exclusively engaged in international drop-shipping with no domestic business in India, you aren’t required to register under GST.
However, you could choose to voluntarily get registered under GST, which might be the most feasible way out due to practical reasons owing to requirements one need to run a successful drop-shipping business from India
II. Why Should I take GST registration?
In order to run a drop-shipping business successfully, you would need a GST number, following are the practical reasons:
- You need to run promotional ads on Facebook and other platforms to get customers
- You need to register to an international payment portal like PayPal to receive international payments
Both of the above would require you to have a GST number, without which you won’t be able to operate under these platforms in a long run. Furthermore, these platforms would charge GST from you on the fees charged by them, which would become your cost if you aren’t registered with GST.
So, the two primary reasons, you should register under GST
1. You will require it to operate under these platforms
2. You can get a refund of GST paid by you for using these platforms, as you are engaged in export of services, so this saves a lot of cost.
III. Do you have to pay any GST to the government?
No, since you are exporting services, you won’t charge GST and also won’t be required to pay GST to the government.
IV. Do I have to file GST returns?
Yes, since you are registered with GST, you will be required to file GST returns periodically like a normal GST dealer. Also, it would be required for you to report the GST paid by you to platforms like PayPal & Facebook and other procurements, if any.
V. How would one claim refund of the GST?
The exporters of services can export the goods without payment of IGST, by submitting a LUT and further they can claim the refund of unutilized input credit. Here’s the detailed procedure https://taxguru.in/goods-and-service-tax/claim-refund-input-tax-credit-tax-paid-exports-goods-services.html
B. Income tax implications
Under Income tax, like any other business, this would be taxable as normal business income. It would be taxable under the head Profits & Gains from Business & profession. An ITR reporting the income from drop-shipping will be filed.
Disclaimer: The above post is only for the purpose of academic discussion and should not be construed as any legal opinion in any matter whatsoever.