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Author - Vijay Tangri 

The startup ecosystem in India has been witnessing an exhilarating growth in India backed by increasing smartphone and internet penetration. With further increase in internet service providers and the launch of 3G and 4G services, at affordable prices – the e-commerce, m-commerce & service industries are set to record even higher growth. The article talks about licensing requirements and other legal obligations to be fulfilled prior to commencing an online business.

Legal Formalities for Starting an Online Business

Legal issues of online businesses in India vary as per different business models. For instance, electronic trading of medical drugs in India requires more stringent e-commerce and legal compliances as compared to other e-commerce activities. Digital communication channels for drugs and healthcare products in India are scrutinized more aggressively than other e-commerce activities. In fact, statutory, regulatory and legislative measures to check online pharmacies trading in banned drugs in India are already in pipeline.

To start an online business which shall have transactional revenue, the following registration are required:

1. Company or LLP Registration

While starting an online venture it good to have a private company or LLP to have limited liability protection and improve the ease of doing business. Having a company or LLP would ensure that opening of bank accounts in the name of the business or obtaining a VAT/Service tax registration are easy and fast. Almost all marketplaces allow Proprietorships and Partnership firms to sell on their website. However, there would be no limited liability protection in case of a litigation. Hence, it is best to start selling with an LLP or Private Limited Company .

However, Most people decide to open a private company to substantiate any online activity and this article would cover that aspect alone. To incorporate a private limited company one must approve its name, registered office address, have at least 2 directors with director identification numbers (DINs), must have a minimum authorized capital of Rs.1 Lakh, memorandum of association (MOA) and articles of association (AOA) , digital signature certificates (DSCs) wherever applicable, etc. Once these conditions and requirements are fulfilled, a certificate of incorporation is sent by post to the registered office of the newly registered company.
The private limited company is also required to comply with income tax related compliances. These include obtaining permanent account number (PAN), tax deduction account number (TAN), value added tax (VAT) registration and obtaining of tax identification number (TIN), professional tax if applicable, service tax, etc.

In case the promoters wish to start a proprietary online business, then it is best to start with a company, as it is the only type of entity that can allow for angel funding or equity funding – a must for successful startup ventures. It is very easy to start and only requires you to open a (current) bank account. Filing personal income tax returns and getting intellectual property rights protection is necessary however.

2. VAT Registration

A VAT registration is a must if starting a proprietary transaction based online website. VAT registration is required for anyone selling goods or products in India and must be obtained from the State’s Sales Tax Department.

3. Bank Account

Once the Company or LLP is incorporated, a bank account can easily be opened in the name of the business by contacting a Bank. In the case of Proprietorship firm, VAT registration must first be obtained to open a bank account in the name of the business. Opening of bank account is essential to list on an eCommerce marketplace or obtain payment gateway for a proprietary eCommerce website.

3. Payment Gateway

A payment gateway would be required for a proprietary online website to process customer payments. Payment gateway providers allow for the website to accept credit card, debit card, net banking, internet banking payments from multiple banks and credit card companies. Therefore, one payment gateway is sufficient to accept many forms of online payments. Once, a payment is received from the customer, the payment is sent to the bank account of the business by the payment gateway providers in one or two business days.

In the case of selling through online marketplaces, the marketplace would accept the payment through their payment gateway and credit the money to the bank account of the seller directly. Hence, a payment gateway is not required and only a bank account is necessary.

4. Legal Documents

While selling online, it is important to protect the business and the promoters of the business through proper legal documentation and contracts for your business . The terms and conditions, disclaimer and privacy policy would have to be drafted by the business based on the nature of its activities and products sold online.

If the business sells through online marketplaces, then the legal document or seller’s agreement is provided by the marketplace and the seller must abide by the seller's agreement. It is important for any business to read the sellers agreements before agreeing to the agreement.

5. Adherence to cyber law crimes

All online businesses must ensure cyber law due diligence in India. This is more so when the cyber law due diligence for companies in India has become very stringent and foreign companies and websites are frequently prosecuted in India for non-exercise of cyber due diligence. Furthermore, e-commerce websites in India must ensure privacy protection, data protection, data security, cyber security, confidentiality maintenance etc as well. Such adherence also needs to be noticed with respect to payment gateways that the businesses opt for.

6. Compliance with other laws

The legal requirements for undertaking an online business in India also involve compliance with other laws like contract law, Indian penal code, etc. Further, online shopping in India also involves compliance with the banking and financial norms applicable in India. For instance, take the example of PayPal in this regard. If PayPal has to allow online payments receipt and disbursements for its existing or proposed e-commerce activities, it has to take a license from Reserve Bank of India (RBI) in this regard. Further, cyber due diligence for Paypal and other online payment transferors in India is also required to be observed.

In certain cases, compliance with labour laws is also required. For instance, the Shops and Establishment Act is a legislation implemented by various States in India. The Act lays down mutual statutory obligation and rights of employers and employees. Registration of shop/establishment is mandatory within 30 days of commencement of work. Other workmen and labour related legislations cover areas like employees provident fund, employees state insurance etc.

It is recommended that all online business entrepreneurs and owners must do a proper techno legal due diligence before opening any website.

The Internet intermediary liability in India may be frequently invoked against e-commerce websites in India. The Information Technology (Intermediary Guidelines) Rules 2011 prescribes stringent liabilities for e-commerce websites in India.

Certain pieces of advice to be kept in mind to avoid any legal hassles:

Taxes

Whether money is received through a payment gateway or a brick and mortar payment system like Cash on Delivery, compliance with any and all tax liabilities is needed.

A content based site needs to pay income tax on the revenues it makes out of advertising but does not need to pay service tax. Until the Goods and Services Tax regime comes into force in India, service providers in many sectors will have to pay tax on the services rendered by them. The Government of India has been planning to come up with a ‘negative list’ of services for some time now, where the services on that list are not subject to tax; i.e. all other services are. That will really simplify the process of finding out whether you have to pay service tax or not. Apart from income and service tax, many states have other state-specific taxes that you will have to pay, like Profession Tax in states like Karnataka.

Intellectual Property Protection

If any content or a logo/design is used, it is very important to get the necessary Intellectual Property rights protection. It is very easy to copy a logo from a website, and unless one takes precautions, the business will have no effective remedy if someone copies it later. The process of protecting your logo is done by filing for a trademark. Read more on trademark search & registration .

People and Agreements

Even if the business exists in cyberspace, the people who run it are very real. So one needs to decide a suitable structure for their business. A Partnership is easier to start, needing only a partnership deed, but your liability is unlimited. A private limited company form is advisable if you are investing large amounts of capital at the outset, and if the numbers (monetary) involved are high. Alternatively, and this is a very sound approach is to start as a Partnership and switch to a Company as your business begins to take off.

Typically, a web-based business may involve one ‘technical’ person, one ‘marketing’ person, and the technical person may only bring his technical expertise to the firm and no capital. This arrangement must be stated very clearly in writing at the outset (especially if you are forming a Partnership, state it in the Partnership Deed).

Legal is often overlooked by new entrepreneurs, it is to be remembered that the cost of NOT getting legal work done is always going to be more than getting it done early on.

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