Archives February 2026

The rapid development of e-commerce has changed how governments handle taxes and how companies conduct business. E-commerce enables businesses to make significant profits in nations where they do not have a physical existence, but traditional tax systems were built around the idea of physical existence. A simple website, app, or cloud server can bring in huge profits from a market far away. This has complicated the determination of where income should be taxed.

Countries have been updating their tax rules to address these issues and make sure that cross-border e-commerce revenue is appropriately taxed where economic value is generated. Income tax, which is based on profits, and indirect tax, which is based on consumption, are now the two main taxation areas that businesses engaged in international digital trade must take into consideration.

Income Tax on Non-Resident E-Commerce Sellers

For foreign e-commerce platforms or sellers operating in a market like India, the central income tax question is whether their digital activities create a “taxable presence” in the country. Traditionally, a company was taxed only if it had a Permanent Establishment (PE) — like an office, warehouse, or employees — in that country. However, digital business models have made this concept less relevant.

Significant Economic Presence (SEP)

To bridge this gap, India introduced the concept of Significant Economic Presence (SEP) under the Income Tax Act. This rule broadens the scope of what qualifies as a taxable nexus.

As per current guidelines, an SEP is deemed to exist if:

• A non-resident earns revenues exceeding ₹2 crore in a financial year from transactions with Indian users, or
• Interacts systematically and continuously with more than 300,000 Indian users online.

If a foreign business meets these criteria, income related to that presence is considered to arise in India and becomes taxable here. However, for countries with which India has a Double Taxation Avoidance Agreement (DTAA), these treaty protections prevail. As of October 2025, the SEP provisions are legally enforced but, in practice, limited by treaty conditions.

Digital Taxes and Equalisation Levy – Current Status

India had previously introduced the Equalisation Levy (EL) to capture tax from cross-border digital transactions. However, following global developments under the OECD’s Two-Pillar Framework, India has phased out these levies.

• The 2% levy on online sales by e-commerce operators was abolished from August 1, 2024.
• The 6% levy on online advertising services was discontinued from April 1, 2025.

With these withdrawals, the corresponding tax exemption under Section 10(50) has also been removed. Consequently, businesses that previously paid the Equalisation Levy are once again subject to regular income tax rules, including SEP and PE conditions.

Indirect Tax Obligations (GST/VAT)

While income tax relates to profits, indirect taxes like the Goods and Services Tax (GST) in India focus on consumption. These taxes follow the destination principle, which means tax is charged in the country where the goods or services are consumed, not where they are produced.

OIDAR Services

India classifies digital services such as cloud storage, streaming, and online data access under Online Information and Database Access or Retrieval (OIDAR) services.

• When such services are provided by a foreign supplier to an Indian consumer, the supplier must register for GST in India and collect Integrated GST (IGST).
• For business-to-business (B2B) transactions, the Reverse Charge Mechanism (RCM) applies — the Indian recipient pays the IGST on behalf of the foreign supplier.

This ensures tax compliance even when foreign service providers have no physical operation in India.

Marketplace Facilitators and TCS

In addition to direct taxes, digital marketplaces acting as intermediaries must collect Tax Collected at Source (TCS) under GST. At present, e-commerce operators are required to collect 1% on the net taxable value of goods or services sold through their platform. This TCS is remitted to the government and credited to the seller’s account, maintaining full traceability of online transactions.

Global Policy Developments – OECD’s Two-Pillar Approach

India’s evolving framework is closely linked with the OECD’s Two-Pillar solution, which seeks to bring consistency to global digital taxation.

• Pillar One (Amount A): Aims to reallocate a share of global profits from the world’s largest multinational companies to the markets where users or consumers are located, regardless of physical presence. India is expected to apply this framework starting in 2026.
• Pillar Two: Sets a 15% minimum global corporate tax rate for multinational enterprises with annual revenues above EUR 750 million. The rule ensures that no major economy loses revenue to tax havens.

India’s removal of its equalisation levy demonstrates alignment with this coordinated international tax model.

Conclusion

Cross-border e-commerce taxation has changed from being a vague topic to one that is governed by both domestic adaptation and international cooperation. Non-resident sellers must now comply with more than just GST registration; they also need to continuously comply with global reporting standards and assess their income tax exposure using ideas like SEP and PE.

In essence, the new regime seeks stability—a balance between encouraging digital trade and ensuring each jurisdiction gets its fair share of tax from the developing global digital economy.

Since the implementation of the Goods and Services Tax (GST) in 2017, the Indian tax framework has undergone several rounds of refinement to simplify compliance and address emerging business challenges. One of the most significant developments came after the 53rd GST Council Meeting (22nd June 2024), which introduced Section 74A to replace the earlier Sections 73 and 74 of the Central Goods and Services Tax (CGST) Act, 2017.

This amendment, applicable from FY 2024–25, marks a major step toward simplifying adjudication and ensuring uniformity in handling cases of tax short payment, non-payment, or wrongful credit, whether or not fraud is involved.

What is Section 74A of the CGST Act?

Section 74A was introduced to streamline the adjudication process and remove the complex distinction between fraud and non-fraud cases that existed under Sections 73 and 74.

Under Section 74A, a proper officer can issue a tax demand notice for:

• Non-payment or short payment of tax,
• Wrongful availment or utilisation of input tax credit (ITC), or
• Erroneous refund.

Unlike earlier provisions, Section 74A applies uniformly, regardless of whether the cause involves fraud, wilful misstatement, or suppression of facts.

Key Provisions under Section 74A

• Minimum threshold: No notice can be issued if the tax liability is less than ₹1,000.
• Time limit: Notice must be issued within 42 months (3 years and 6 months) from the due date of the annual return or the date of the erroneous refund.
• Evidence requirement: Officers must provide material evidence when alleging fraud or misstatement; assumptions or suspicions alone are insufficient.
• Penalty:
• For non-fraud cases: 10% of the tax due or ₹10,000, whichever is higher.
• For fraud or wilful misstatement: Penalty equal to the tax due.
• Relief: Taxpayers paying full dues before notice issuance get a penalty waiver; post-notice payment within 60 days also attracts reduced penalties.

In essence, Section 74A merges and rationalises the earlier dual structure of Sections 73 and 74 into one cohesive framework.

What is Section 73 of the CGST Act?

Section 73 dealt with cases of non-payment or short payment of tax or erroneous refund where the issue did not involve fraud, wilful misstatement, or suppression of facts.

Key Features of Section 73

• Notice Period: The officer could issue a notice 3 months before the expiry of the 3-year limitation period.
• Time Limit for Order: 3 years from the due date of the annual return.
• Penalty: 10% of tax due or ₹10,000, whichever is higher.
• Relief: If tax and interest were paid before the notice, no penalty was levied.

Section 73 primarily handled genuine errors or inadvertent non-compliance.

What is Section 74 of the CGST Act?

Section 74 applied to similar cases as Section 73 but with an important distinction — it was invoked when the tax shortfall resulted from fraud, wilful misstatement, or suppression of facts.

Key Features of Section 74

• Notice Period: At least 6 months before expiry of the 5-year limitation period.
• Time Limit for Order: 5 years from the due date of the annual return.
• Penalty:
  • 15% of tax if paid before notice,
  • 25% if paid within 30 days of notice,
  • 50% after 30 days, and
  • 100% in case of non-compliance or proven fraud.

This section aimed to deter intentional tax evasion but often led to subjective interpretations and long litigation due to the difficulty in proving intent.

Section 74A vs Sections 73 & 74 of the CGST Act — Key Differences (2025 Update)

Particulars	Section 74A (New)	Section 73 (Old)	Section 74 (Old)
Applicability	Applies to all cases of short payment, non-payment, excess refund, or ITC misuse — irrespective of fraud	Applies to cases without fraud or wilful misstatement	Applies only to cases involving fraud, wilful misstatement, or suppression
Minimum Threshold	No notice if tax due < ₹1,000	No such limit	No such limit
Basis of Notice	Must be backed by material evidence	Could be based on assumption	Could be based on suspicion
Time Limit for Issuing Notice	Within 42 months	3 months before expiry of 3 years	6 months before expiry of 5 years
Time Limit for Order	Within 12 months from notice	3 years	5 years
Penalty (Non-Fraud Cases)	10% of tax due or ₹10,000, whichever is higher	10% of tax due or ₹10,000, whichever is higher	Not applicable
Penalty (Fraud Cases)	Equal to the tax due	Not applicable	Equal to tax due (up to 100%)
Voluntary Payment Before SCN	No penalty if full tax + interest paid	No penalty if full tax + interest paid	15% penalty on tax due
Voluntary Payment After SCN	Within 60 days: reduced penalty (25% in fraud cases)	Within 30 days: no penalty	Within 30 days: 25% penalty (fraud cases)
Objective	Simplify and unify adjudication for both fraud and non-fraud cases	Handle non-fraud discrepancies	Handle fraud-related discrepancies

Conclusion

The introduction of Section 74A in place of Sections 73 and 74 represents a major simplification under GST 2.0. It unifies the treatment of tax discrepancies, enforces accountability on officers to provide evidence, and ensures fairer penalty structures.

This change is expected to reduce disputes, speed up resolution of cases, and provide clarity to taxpayers— especially MSMEs — thereby strengthening India’s GST ecosystem in the years ahead.

The GST framework of India was created to make indirect taxation more transparent and easy to use. However, issues with compliance, such as delayed refunds, often put a burden on the working financing of businesses. Section 56 of the Central Goods and Services Tax (CGST) Act, 2017, provides statutory interest on delayed refunds in order to ensure on-time refunds and transparency within the tax system.

For taxpayers whose refund applications are still pending after the officially prescribed time limit, this part acts as a protection. Since it recognises that refund delays can cause financial hardship, it compensates taxpayers for the period that their money was with the government.

Understanding Section 56 of the CGST Act

Section 56 came into force on 1 July 2017, aligning with the implementation of GST. The provision specifically deals with interest payable to taxpayers when refunds are not issued within the stipulated period.

The section provides that:

• If any tax ordered to be refunded under Section 54(5) is not issued within 60 days from the date of receipt of a valid refund application, interest must be paid to the applicant.
• The interest rate notified is 6% per annum, applicable for the period of delay beyond those 60 days.
• If a refund arises from a court, tribunal, or appellate authority order that has attained finality and still remains unpaid 60 days after a refund application is filed, the applicable interest rate increases to 9% per annum.

In essence, Section 56 ensures that taxpayers are fairly compensated for any delay caused by administrative inefficiency or technical issues in refund processing.

Objective and Rationale

The underlying purpose of Section 56 is rooted in fairness and accountability. Businesses rely heavily on refunds, especially exporters and entities dealing with zero-rated supplies. When refunds are delayed, working capital is locked in the system, impacting production cycles, liquidity, and competitiveness.

By mandating interest, the law:

1. Compensates taxpayers for the financial cost of delay.
2. Creates a deterrent against lax administrative practices.
3. Reinforces trust in the GST refund mechanism.
4. Promotes faster processing and settlement of refund claims.

The provision is compensatory, not penal, and its enforcement does not depend on the reason for the delay, unless the delay is attributable to the taxpayer.

Legal Framework and Key Conditions

To understand how Section 56 operates, it must be read alongside Section 54 (which outlines refund procedures) and relevant CGST Rules.

1. Starting Point of Interest: Interest becomes applicable from the 61st day after the application is received, calculated up to the actual date of refund credit to the taxpayer’s account.
2. Authority Responsible: The proper officer is responsible for sanctioning the refund and calculating the interest under Section 56.
3. Rate of Interest:
   1. 6% for standard delayed refunds.
   1. 9% for delayed refunds arising from appellate or court orders.
      (The rates were notified through Central Tax Notification No. 13/2017).
4. Mode of Payment: The interest must be credited directly to the taxpayer’s bank account, along with the refund amount, through Form RFD-05.
5. Applicable Rules:
   1. Rule 94 of the CGST Rules, 2017, specifies how to compute and disburse the interest on delayed refunds.
   1. Rule 97 provides guidelines for handling refund-related funds under the Consumer Welfare Fund.

Practical Implications for Taxpayers

Taxpayers should take an active role in ensuring their refund timelines are properly tracked. Here are key takeaways for businesses:

• A refund application is acknowledged once filed in Form GST RFD-01 through the GST portal. The 60-day timeline begins from this filing date.
• If no refund is credited by the 60th day, taxpayers automatically become eligible for interest.
• Even if the refund is processed later, interest continues to accrue until the payment date.
• Taxpayers should preserve communication, acknowledgements, and refund order copies for claiming interest if delayed.
• Delays caused by taxpayer errors or pending clarifications do not qualify for compensation.

As of October 2025, the GST Council and the Central Board of Indirect Taxes and Customs (CBIC) have prioritised automation in refund grants and interest computation to minimise disputes.

Conclusion

The CGST Act’s Section 56 is an essential provision that safeguards taxpayers’ financial interests by guaranteeing timely reimbursement of GST refunds. By clearly defining who is responsible for delayed acts, it promotes balance in the relationship between the government and the taxpayer. Since it is already established that interest on delayed refunds is required and automatically calculated, businesses may argue their rightful claim without having to endure lengthy legal proceedings.

To put it simply, timely refunds maintain the legitimacy of the GST system, and Section 56 makes sure that justice is served where refunds were delayed.

The introduction of the Goods and Services Tax (GST) system is among the biggest changes to the tax governance in India in recent years. Under the GST, many indirect taxes that were levied by the union and state government have been merged into one simple system. The most significant change in the GST system is the Reverse Charge Mechanism (RCM), which is intended to simplify the tax system. RCM allows the liability to pay the GST effectively to be shifted from the supplier to the recipient of the goods or services. RCM was first introduced in the Central Goods and Services Tax (CGST) Act of 2017 and continues to develop in the GST system, which has enhanced the financial structure of the country and reduced tax fraud and evasion of taxes.

Concept of RCM

Under the regular system (forward charge mechanism), the supplier collects GST from the buyer and deposits it with the government. Under RCM, this arrangement reverses — the buyer or recipient is responsible for paying the applicable tax directly to the government.

This mechanism generally applies in three cases:

1. Specified goods and services, as notified by the government under Section 9(3) of the CGST Act.
2. Purchases from unregistered suppliers, covered under Section 9(4) of the CGST Act.
3. Imports of services into India, governed by Section 5(3) of the Integrated GST (IGST) Act.

Once the recipient has paid the applicable tax, they can later claim Input Tax Credit (ITC), subject to conditions.

Objectives of the RCM

The main aim of RCM is not just compliance but also ensuring fair tax distribution across industries. It plays a key role in:

• Taxing informal sectors: RCM brings small-scale and unregistered suppliers into the tax fold indirectly, improving revenue coverage.
• Ensuring tax on imports: It allows India to collect GST efficiently when services are sourced from foreign entities not registered under Indian laws.
• Encouraging accountability: Transferring liability to registered recipients makes audits and record-keeping more reliable.
• Preventing evasion: It helps plug tax leakages that may occur when unorganised or small businesses operate outside the GST system.

Legal Framework

1. Section 9(3) – Notified Goods and Services: The central government notifies certain goods and services where tax must be paid under RCM. These commonly include:
   1. Legal services by advocates or law firms
   1. Sponsorship services
   1. Transportation by goods transport agencies (GTAs)
   1. Security services provided by non-corporate suppliers
   1. Payment of director’s fees or similar remuneration
   1. Government services supplied to business entities, except exempted ones
2. Section 9(4) – Purchases from Unregistered Suppliers: This applies when a registered person procures goods or services from an unregistered vendor. Currently, this provision is limited in scope, primarily applying to specific real estate transactions such as shortfall purchases by promoters from unregistered suppliers.
3. Section 5(3) of the IGST Act: This section covers imports of services, where the Indian recipient bears the liability for paying IGST on the value of services imported from overseas.

RCM Applicability and Recent Updates

The scope of RCM has widened through GST Council decisions, especially during 2024–2025. Key updates include:

• Imports of online services: Tax coverage now extends to cross-border digital content, cloud computing, and software licensing.
• Renting of commercial properties: The 54th GST Council Meeting (September 2025) recommended RCM applicability to unregistered suppliers renting commercial units to registered recipients.
• E-commerce operators: Under Section 9(5), platforms like food delivery apps, cab booking services, and online accommodation portals must pay GST on services provided through them by unregistered providers.

Businesses paying tax under RCM must issue a self-invoice and a payment voucher for every such transaction to ensure proper accounting and audit trails.

Documentation and Compliance Requirements

Compliance under RCM requires businesses to maintain proper documentation and adhere to timelines. Key obligations include:

1. Issuing self-invoices for supplies from unregistered vendors.
2. Creating payment vouchers while releasing payments under RCM.
3. Reporting RCM liabilities and ITC claims in GSTR-1 and GSTR-3B returns.
4. Ensuring RCM taxes are paid through the cash ledger, as ITC cannot be used for payment of RCM liability.
5. Retaining records such as tax calculation proofs, service contracts, and transaction details for audit.

All documents must follow the specifications in Rule 46 (for invoices) and Rule 52 (for payment vouchers) of the CGST Rules, 2017.

Conclusion

One of the main components of India’s modern GST framework is the Reverse Charge Mechanism. It encourages fairness and compliance while guaranteeing taxes are collected even from suppliers or industries not included in the official tax chain. Although RCM gives registered businesses more administrative responsibilities, it also improves transparency, expands the tax base, and promotes financial stability. Businesses must remain updated on the latest regulations, keep correct records, and coordinate their internal accounting systems in order to be compliant with the ongoing changes under the new GST regime.