Require Clarification on Tax Implications for Marketplace Model

This query is : Resolved

Hari Kumar (Querist)
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22 June 2024 We have recently started operating a marketplace and would like to seek clarification on the tax implications based on the following scenarios:

Case Scenario 1:

In our marketplace model, we receive payments from international clients, and services are provided by Indian developers. We charge a flat 13% commission and a 5% payment gateway fee (Actual as per Paypal).

Please consider the following example:

Client Payment: 1000 USD (converted to INR, Rs. 82,550)
Service provided by: Indian developer
Platform Fee: 13% of Rs. 82,550 = Rs. 10,731.50
Payment Gateway Fee: 5% of Rs. 82,550 = Rs. 4,127.50 (GST included by the payment gateway provider for their service)
The payment breakup to the developer is as follows:

Client Payment Total: Rs. 82,550
Platform Fee: Rs. 10,731.50 + 18% GST (Rs. 1931.67) = Rs. 12663.17
Payment Gateway Fee: Rs. 4,127.50
Amount payable to the developer: Rs. 82,550 - Rs. 12663.17 - Rs. 4,127.50 = Rs. 65,759.33
Additionally, we need to deduct 1% TDS from the final amount payable to the developer:

TDS: 1% of Rs. 65,759.33 = Rs. 657.59
Net Amount payable to the developer after TDS: Rs. 65759.33 - Rs. 657.59 = Rs. 65101.74

Case Scenario 2:
For payments received in INR from domestic clients, the breakup will be as following. If the developer or service provider is under the GST slab, GST needs to be added or adjusted to the client payment, needs to be mentioned on the client invoice.

Client Payment: Rs. 50,000
Service provided by: Indian developer
Platform Fee: 13% of Rs. 50,000 = Rs. 6,500
Payment Gateway Fee: 5% of Rs. 50,000 = Rs. 2,500 (GST included by the payment gateway provider for their service)
The payment breakup to the developer is as follows:

Client Payment Total: Rs. 50,000
Platform Fee: Rs. 6,500 + 18% GST (Rs. 1,170) = Rs. 7,670
Payment Gateway Fee: Rs. 2,500
Amount payable to the developer: Rs. 50,000 - Rs. 7,670 - Rs. 2,500 = Rs. 39,830
Additionally, we need to deduct 1% TDS from the final amount payable to the developer:

TDS: 1% of Rs. 39830 = Rs. 398.3
Net Amount payable to the developer after TDS: Rs. 39,830 - Rs. 398.3 = Rs. 39,431.7

FIRC/FIRA Considerations:
In both scenarios mentioned above, we encounter issues with FIRC (Foreign Inward Remittance Certificate). Payment gateways or banks will not issue FIRC/FIRA in the name of the service provider; they will only issue it in our name. This means the service providers cannot claim the export of service, even if the invoice is generated in their name and in international currency.

Case Scenario 3:

Consider a different approach where all charges are borne by the client.

Client makes a deal of 1000 USD with the service provider.
We take a 13% commission and a payment gateway fee from the client's payment and bill them for it.
The remaining amount, after conversion, is deposited to the service provider (after deducting 1% TDS).
This approach ensures it is classified as an export of service, and GST is zero as we are charging the client (if international), not the service provider. FIRC in our name will still be acceptable since we will be doing the export of service.

To summarize:

Client Payment: 1000 USD (converted to INR)
Commission: 13% charged to the client
Payment Gateway Fee: Charged to the client
Amount Payable to Developer: (Converted Amount - 13% Commission - Payment Gateway Fee) - 1% TDS

We seek your clarification on the GST, TDS, and billing structure for these scenarios.

Queries:
1. Can I do case scenario 3 for my international clients.
2. Case scenarios 3 will be deemed as Export of service for our marketplace?
3. We have to register for GST even if threshold is below 20lacs, Correct?
4. 1% TDS is deducted on all payments we remit to our service providers irrespective of threshold amount, Correct?
5. We will have to raise 2 invoices, correct me if wrong:
a) One invoice service provider to client (display breakup of GST if service provider is registered for GST)
b) Second invoice on the commission we charge (either client or service provider)
c) Invoice numbering will be different for every transaction? Cause one transaction will have two invoice generated.
6. Paypal or payment gateway charges: How do we bill this? We have no extras in this scenario. But payment gateway guys will only bill us, not service provider.
7. FIRC/FIRA is given on our company name, so in GST we can follow case scenario 3 & will it be deemed export of service?

What is the best approach for us?

Your guidance on how to best structure these transactions for compliance would be greatly appreciated.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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10 July 2024 It seems you have a detailed set of questions related to tax implications, billing structure, GST, TDS, and FIRC/FIRA considerations for your marketplace operations involving international and domestic transactions. Let me address each query based on the information provided:

1. **Can I do case scenario 3 for my international clients?**
- Yes, you can follow case scenario 3 for your international clients where you charge them for the service and commission, and then remit the net amount to the service provider after deducting TDS. This approach ensures that the transaction can be classified as an export of service.

2. **Will case scenario 3 be deemed as Export of service for our marketplace?**
- Yes, scenario 3 can be considered an export of service if the conditions for export of service under GST laws are met. Since the service is being provided to clients outside India and payment is received in foreign currency, it qualifies as an export of service.

3. **We have to register for GST even if threshold is below 20 lakhs, correct?**
- If your marketplace is involved in interstate taxable supply of services, registration under GST is mandatory regardless of the turnover threshold. Export of services also falls under GST registration requirements.

4. **1% TDS is deducted on all payments we remit to our service providers irrespective of threshold amount, correct?**
- Yes, TDS at the rate of 1% needs to be deducted on all payments made to resident service providers if the payment exceeds Rs. 50 lakhs in a financial year. This is mandated under Section 194-O of the Income Tax Act, 1961.

5. **We will have to raise 2 invoices, correct me if wrong:**
- a) **Invoice from service provider to client:** Yes, this invoice should reflect the service provided along with applicable GST if the service provider is registered under GST.
- b) **Invoice on the commission we charge:** Yes, you should issue an invoice for the commission charged to either the client or the service provider, depending on your business arrangement.
- c) **Invoice numbering will be different for every transaction:** Yes, each invoice should have a unique identifier for proper record keeping and compliance purposes.

6. **Paypal or payment gateway charges: How do we bill this?**
- Payment gateway charges should ideally be billed separately to your clients or factored into your service fees. Since payment gateways charge you, and not the service provider, you can include this as part of your operational expenses rather than billing it separately to the service provider.

7. **FIRC/FIRA is given in our company name, so in GST, can we follow case scenario 3 and will it be deemed export of service?**
- Yes, if you receive an FIRC/FIRA in your company's name for the foreign exchange received from your international clients, and you are fulfilling the conditions for export of services under GST laws, you can treat these transactions as exports of service. This means you can apply zero-rated GST on these transactions.

**Best Approach:**
- Ensure compliance with GST and Income Tax regulations for both domestic and international transactions.
- Maintain proper documentation including invoices, TDS certificates, and FIRC/FIRA for audit purposes.
- Consult with a qualified tax advisor or chartered accountant who can provide specific guidance tailored to your business operations and ensure compliance with all applicable laws.

By following these guidelines and seeking professional advice, you can structure your marketplace transactions effectively while minimizing tax implications and ensuring regulatory compliance.