Legal Requirements for Ecommerce Businesses

Selling online doesn’t spare you from all the legal requirements that offline businesses have to bear. But don’t just think of legalities as expenses and taxes; they protect your business, too.

Online selling is convenient not just for customers, but for sellers, too, isn’t it? Not only are overheads lower, you can access all of India. But the law sees both you and your offline counterparts as the same. The same laws, taxes and compliances apply. In fact, they apply sooner. While Central Sales Tax, which is levied on inter-state trade, is unlikely to apply to offline businesses until they’re successful, it will apply to online sellers immediately. Many e-commerce businesses, however, fail to fully appreciate the importance of these legal matters. Let’s find out what you need to do.

Business Registration

Without registering your business as a private limited company, limited liability partnership (LLP) or one-person company (OPC), you’re exposing yourself to plenty of risk. You’re personally accountable for all the debts of the business; in other words, a debtor can get you for all you’re worth. Through registration, you create a separate entity, which limits your liability to just the investment in the business. If you’re looking to raise funds from investors, the private limited structure is your only option, though the LLP can be more tax-efficient; the OPC is for single entrepreneurs.

VAT/Sales Tax Registration

These taxes apply to all businesses selling tangible goods. The difference between value-added tax (VAT) and central sales tax (CST), however, is that the former applies to goods sold in a single state while the latter applies to inter-state trade. Businesses need to collect VAT based on turnover, which varies from state to state, while CST is applicable regardless of turnover. Being an e-commerce business, you would need to register for both as soon as you beging operations, or soon after you register your business.

Vendor Agreement

All e-commerce marketplaces must have in place an agreement with vendors listed on their portal. If you’re not running a marketplace and are only selling your own goods, then an agreement with your suppliers. This agreement should define the expectations of both parties, including the roles and responsibilities of the parties, how default will be dealth with, payment, if any, etc.

Terms of Service & Privacy Policy

You may have noticed these on every other website, and now yours needs one, too. The terms of service will inform your users of their rights and responsibilities on your website and limit your company’s liability as far as possible. The privacy policy will state what will be done with the information the user submits to the website. These two documents are essential on all e-commerce websites. You may also want to spend on data security as the maximum penalty for failing to protect customers’ data is Rs. 5 crore.

Intellectual Property Protection

As an e-commerce business, you need to ensure that you aren’t violating anyone else’s intellectual property, while also protecting your own. Therefore, ensure that the name you choose to operate or sell under isn’t too similar to anyone else’s name. If you’re sure of the name, it would also make sense to file it with the Trademarks Registry. You would also need to ensure the authenticity of the brands being sold on your portal. The sale of fake items would lead to legal notices for owners of the brand.

This is a guest post by Hrishikesh Datar, founder of Vakilsearch, India’s leading online legal services provider for businesses and individuals. Vakilsearch is a web portal that provides documentation services, business and intellectual property registrations, including copyright and trademark, tax filing and accounts-related services.