This blog is a practical guide for Shopify Partners in India, walking through the complete tax and regulatory journey—from setting up your entity to planning your exit. It covers key aspects like choosing between LLP and private limited company, understanding revenue flows, GST implications, foreign remittance rules, employment arrangements, compliance on software payments, secretarial tasks, and everything you need to know to stay compliant and prepared at every stage of your business lifecycle.
Background
Shopify has transformed the e-commerce world, empowering entrepreneurs across the globe. Behind the scenes, Shopify Partners—app developers and service providers—play a vital role in enhancing the ecosystem. With a growing number of Indian SaaS providers joining the Shopify Partner network, understanding India’s tax and regulatory framework is essential.
Partners often face questions like: What kind of entity should I form? Who is my actual customer—Shopify or the end user? How do I handle GST on overseas revenues? The blog addresses such questions in depth.
1. Type of Entity to Set-Up
Choosing between a Private Limited Company and a Limited Liability Partnership (LLP) affects tax liability, ownership flexibility, and long-term planning.
- Private Companies are taxed at 22% (plus surcharge and cess) under the new regime. However, dividend distribution is taxable in shareholders’ hands.
- LLPs face a 30% tax rate but don’t have tax on profit distribution.
Key takeaway: LLPs are taxed higher, but profit sharing is simpler. The decision must align with your plans—cash flow needs, stock options, and potential exit. If a switch is needed, converting a company to an LLP is tax-neutral under specific conditions (Section 47(xiiib)).
2. Revenue Treatment
2.1 Accounting
Revenue recognition depends on your contract with Shopify. Since the partner has no direct agreement with the end customer, Shopify is considered the customer for accounting purposes. Revenue should ideally be tracked against services delivered and payment status.
To do this well, Shopify Partners should:
- Build systems to track services used by end customers
- Maintain receivables data
- Identify and act on overdue payments
- Document usage metrics to support accrual accounting if chosen
Also, clarify whether revenue should be reported gross or net of Shopify’s revenue share—especially critical for M&A valuations.
2.2 GST
Shopify Partners generally treat their income as export of services, as they contract directly with Shopify and receive payments from abroad.
To ensure zero-rated tax treatment:
- Obtain a Letter of Undertaking (LUT)
- Realize revenue in foreign currency
- Secure Foreign Inward Remittance Certificates (FIRCs)
Reverse charge on Shopify’s share may apply, but if revenue is booked net, a different interpretation may be taken—though this remains a grey area.
2.3 Withholding Tax
Tax must be withheld on payments to non-residents if they’re taxable in India. Use tax treaties (like India-US or India-Canada) to determine favorable rates, and collect TRC, Form 10F, and PE declarations from vendors.
2.4 Exchange Control Laws
Receiving revenue net of Shopify’s share is treated as “netting off” under FEMA. This typically requires approval from your Authorized Dealer bank—unless your income is genuinely net (post-sharing). Filing SOFTEX forms also applies, so ensure:
- IEC code is obtained
- Non-STPI registration is in place (if not operating from STPI units)
- Declarations are filed within deadlines
3. Employment Arrangements
3.1 Employment Agreement
Make sure agreements clearly assign IP ownership to your company and contain confidentiality, non-solicit, and non-compete clauses.
3.2 Labour Law Compliance
Evaluate applicability of laws like PF, gratuity, and bonus. Contract workers may also count towards thresholds.
3.3 TDS Compliance
Ensure TDS on salaries is accurate and that declarations, investment proofs, and deductions are collected from employees. Factor in all benefits like stock options, travel perks, and gifts.
3.4 ESOPs
ESOPs are valuable tools for talent retention and are available only for companies, not LLPs. This may influence your choice of entity.
3.5 POSH Policy
For entities with 10 or more employees, having a POSH policy and Internal Complaints Committee (ICC) is mandatory.
4. Software and Consultancy Payments
Payments to Indian vendors attract 10% TDS (with some exceptions). For foreign vendors, tax rates range from 0% to 22%, based on domestic laws or DTAA.
Collect and maintain documentation like TRC, Form 10F, PE declarations, and Form 15CB/15CA. These are often missed when paying via credit cards, so internal controls are essential. GST on reverse charge may also apply.
5. Accounts & Audit
Books must comply with Income Tax, GST, Companies Act, and LLP laws. Documentation supports tax and refund claims.
- Employee expense reimbursements should be backed by receipts
- New rules require accounting software to maintain an audit trail (mandatory for companies)
- Internal controls should ensure real-time and accurate entries
6. Secretarial Compliances
6.1 For Companies
Meetings, resolutions, statutory registers, and form filings (like AOC-4, MGT-7, MGT-14, DPT-3) are mandatory. Special resolutions need 75% shareholder approval.
6.2 For LLPs
Compliances are simpler:
- Form 11 for annual return
- Form 8 for Statement of Account & Solvency
- Form 3 for LLP agreement changes
- Form 4 for partner changes
7. Key Tax Compliances
7.1 Income Tax
- Deduct and remit TDS
- File quarterly TDS returns
- Pay advance tax on time
- File ITR, audit reports, and SFT returns
7.2 GST
- GSTR-1 (monthly outward supplies)
- GSTR-3B (monthly summary)
- GSTR-9/9C (annual returns, if applicable)
- File refund claims on time
8. Other Compliances
- IP registration: Protect trademarks, logos, domains, copyrights
- Professional tax: Varies by city/state
- Shops & Establishment registration: Required in most states
9. Exit / Sale
9.1 Modes of Exit
Exit could be through:
- Share/LLP interest transfer
- Business or IP sale
- Hybrid models like IP transfer + service agreement
9.2 Regulatory Aspects
Deals often include deferred or contingent consideration and equity swaps. Regulatory feasibility must be evaluated for each structure.
9.3 Tax Aspects
- For companies, business/IP sale leads to double taxation (entity + shareholder).
- For LLPs, taxes are lower since profit distribution is exempt.
- Buyers prefer IP or business purchase due to tax depreciation and regulatory ease.
- International buyers may push for IP relocation due to stronger IP laws, ease of management, and challenges in outbound mergers.
Conclusion
Shopify Partners in India operate in a fast-moving, globally linked tech space. Staying on top of tax rules, compliance, and legal requirements from day one is non-negotiable. Whether you’re setting up, scaling, or planning an exit, understanding the tax and regulatory nuances can save you both money and trouble. A clear strategy aligned with the law goes a long way in ensuring sustained success and smooth exits.
