Be warned – The MLM tax net is tightening

For more than the past decade Strategy India and S.I. Worldwide have been keeping direct sellers and corporate executives abreast of changes happening in the world that will affect business decisions, international expansion plans as well as direct seller’s/distributor’s personal financial decisions.

Asia, and especially India have always held a magnetic attraction for North American and European companies seeking expansion and increased profits. Sadly, many of these expansions come to a quick and financially costly end as each company falls foul of local legislation leading to heavy fines as well as potential imprisonment.

There are a proliferation of Network marketing/MLM/Direct Sales operations in Asia/India with more than 90% operating illegally. There appears to be a complacent attitude emanating from companies and direct sellers/ distributors alike who think that as their office is outside the country, or that they are an online company which makes them immune from prosecution. Well nothing could be further from the truth.

Any one making purchases outside of India, or earning income from such activities is liable to paying taxes.

India is made up of many independent states some of whom write their own legislation. One such state is Kerala who are generally seen as being the pace setters in terms of legislation, especially when it involves the Network marketing/MLM/Direct Sales industry.

It was stated in the Kerala Budget – 2015 that “all multi-level marketing companies, their distributors and agents would be made liable to take out registration under the Kerala Value Added Tax Act, 2003. As per Para 322 of the Budget Speech – 2015, it was announced that:

322. All Multilevel Marketing Companies, their distributors and agents would be made liable to take registration and pay tax under the Kerala Value Added Tax irrespective of their turnover”.

The Government of Kerala issued a circular outlining certain guidelines for the functioning of Multi-Level Marketing Entities/Direct Sellers.

Below we list areas that might prove to be the most challenging:

Every Network marketing/Multi-Level Marketing/ Direct Selling Entity operating within the State should:

  1. Register under the Kerala General Sales Tax Act, 1963 / Kerala Value Added Tax Act, 2003 and the Income Tax Act.
  2. The Multi-Level Marketing/Direct Selling Entity should have an Official Website wherein the relevant details viz. Names and Identification numbers of their authorized Direct Sellers and provisions for registering complaints by the consumers shall clearly be stated.
  3. The Multi-Level Marketing/Direct Selling Entity should have a Consumer Grievance Cell that should ensure redressal of consumer grievances within seven days from the date of making such complaints.
  4. Appointment/Authorisation of Direct Sellers:
    While appointing or authorising the Direct Sellers, the Multi-Level Marketing/ Direct Selling Entity should conform to the following procedure:

    • Each Direct Seller should be allotted a Unique Identification Number before granting license/permission to start Direct Selling and be given with an Identity Card.
    • The Multi-Level Marketing/Direct sellers should undergo training on the do's and don'ts of direct marketing in an approved institution by the Government such as Gulati Institute of Finance and Taxation (GIFT), Sreekaryam, Thiruvananthapuram.
    • Each Direct seller should take out registration under the Kerala Value Added Tax Act, 2003, if the Multi-Level Marketing Entity is not opting for payment of tax under compounded system envisaged in the Act. If the Multi-Level Marketing Entity has opted for paying the tax at the first point of sale on Maximum Retail Price, the subsequent dealers including direct sellers need not take out registration nor pay any Value Added Tax.

As can be seen this act is all encompassing and is an indication of where the future lies for MLM /Direct Sales companies.

No matter how daunting and negative this may look rest assured that everything is not that bad.

Asia is a great market with immense potential.

India is an equally lucrative market for those companies who are follow ethical and fair policies while being complaint to the limited laws in force.

Strategy India is fully equipped to consult network marketing/ direct selling corporations as well as government agencies on What & Why & How about the structure, compensation plans, codes of ethics, policies, and best business practices for network marketing/mlm/direct selling organisations.

For more advice and guidance: [email protected]

Reference: CIRCULAR No. 26/2015

Sub: KVAT Act, 2003 – Multi-level Marketing Entities – Registration, payment of tax at compounded rates - Operational guidelines issued – Download