Drop-shipping has influenced many people to become an entrepreneur as it offers freedom to the entrepreneurs to check new product ideas and concepts taking a lower risk and while not owning or paying for the new product idea or product plan or business line.
This is a retail method of business where the drop shipper doesn’t need to keep the stock of the product to sell. Unlike retail businesses, in drop-shipping, sellers are not ought to keep a stock of inventory, and still, the enterprise can fulfill every demand of the customers for any product.
Like every other business head, dropshipping is also taxable. Income from Drop Shipping Business is taxable under Income Tax as any other normal business income. The head under which the Income from Drop Shipping Business is taxable is Profit & Gains from Business & Profession (Section 28 of the Income tax Act, 1961).
Drop-shipping is a business in which the seller sells the goods which he does not own at the time of selling goods but passes the order to a third party after receiving the order. Such a third party then delivers the order to the purchaser. As a result, the seller does not need to handle the goods directly. Within the drop-shipping business, the drop shipper purchases the item from a third party and ships it on to the client.
Dropshipping solves a lot of retail problems e.g., Sellers do not need to maintain large warehouses and manufacturers don’t have to manage the retail outlets. The main distinction between standard retailing and drop-shipping is that the selling merchant does not stock the inventory, instead he purchases the goods from the third party (wholesaler or manufacturer) to fulfill the orders.
International drop-shipping is where the customers and the suppliers are both based outside of India. For example, the target customers are based in the USA, and goods are supplied by suppliers based in China.
So, a person in India takes 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.
Customers browse a catalog or site, choose the product they wish to buy, and pay the seller, including all the applicable taxes. Then they receive their shipment, within the specified delivery period.
When the seller receives an order request and payment from a customer for any item, if the order is not in stock, then the seller places an order with the supplier. Along with payment, the seller provides the supplier with the customer’s shipping information.
When the supplier receives an order and payment from the seller, he locates the items ordered, packs them up, and ships the order directly to the customer. The supplier fulfills the order but does not maintain or have a relationship with the end customer.
As a result of which the seller doesn’t have to handle the stock of the products.
Tax is imposed through different modes, including the locations of all three parties, the taxability of the goods, and where the seller or supplier has an obligation to collect sales tax. Usually, the customer pays sales tax to the seller then the seller remits the tax to the state and provides a resale exemption certificate to the supplier, and then the supplier maintains the certificate as proof of sales tax exemption. GST is also imposed on drop-shipping businesses.
Income tax is a type of tax that the central government charges on the income earned during a financial year by individuals and businesses. Income from Drop Shipping Business is taxable under Income Tax as any other normal business income. The head under which the Income from Drop Shipping Business is taxable is Profit & Gains from Business & Profession (Section 28 of the Income Tax Act, 1961).
Section 28 of the Income Tax Act, provides that the income is chargeable to tax under the head “Profits and gains of business or profession” are:
According to Section 28, the following are the main conditions that require an income to be charged under profits and gains of business or profession:
Under Section 28, one of the main aspects of determining if an income must be classified under profits and gains of business or profession is that if a business was carried on by the assessee at any time during the financial year. It is, however, not necessary that the business is carried out throughout the financial year or till the end of the financial year.
Thus, residential status is the main criteria for taxability in India, if one is a resident of India then one is liable to pay the tax of the global income, irrespective of the taxability of the income earned overseas in the country of Income. But can claim exemption of tax paid overseas in India based on the Double Taxation Avoidance Treaty entered into with that country. Double taxation avoidance treaty is a tax treaty between two or more countries to avoid taxing the same income twice. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country.
The assessee has to file an ITR for reporting the income earned from the drop-shipping business. If any Drop-shipping business is carried on by an assessee during the previous year then the Income of the previous year of the assessee from drop shipping business is taxable as per Income Tax Act in the following assessment year. In e Commerce transactions, the “point of sale” is considered to be the buyer’s “ship to” address. It doesn’t matter where the buyer is located, the only matter is where the buyer takes possession of the item after it is shipped.
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