Impact of GST on e-Commerce Sector

By Registrationwala

12th April 2017

 

Goods and Services Tax is a revolutionary step taken by the Indian government. It is a bill that will have far reaching impact on the economy and that impact will be a sum total on its impact on many of the live sectors in India, a country only second to China in terms of internet market. That statistic should tell you about how important e-commerce sector is in today's world.

To put it simply, e-commerce basically means conducting any commercial activity using internet as a medium. Since India is still on its way to get acceptably digitalized, the rules governing the taxation in the e-commerce sector are very clumsy.

At present, a federal indirect tax structure with a diverse tax regime is followed in various states, and this has led to a lot of confusion. There is uncertainty on how the tax will be treated in the online market, and more so by the aggregators. Since a lot of ambiguity exists, GST tries to iron out major flaws that currently  exist in this sector. This is also an attempt to insulate the sector from ad hoc laws and subjective levies that the State governments are entitled to impose.

GST attempts to address the issue by having a separate chapter on e-commerce but the proposed rules and regulations could lead to higher compliance challenges. We will get to that later in this section. 

Who is under the umbrella?

According to the chapter, an 'electronic commerce operator' is any person who owns, operates or manages an electronic platform that is used to facilitate supply of goods and services or in providing incidental information or services as per need.

Who is NOT under the umbrella?

Any online retailer who supplies goods and services on their own behalf is not included under the definition of an electronic commerce operator. Thus, the process of tax collection at the source and other suggested compliances will not be applicable to them.

Implications of GST

  • Ecommerce operators who are covered will need to collect tax at source - that out of the total amount that is applicable to the supplier. - and will need to deposit the same to the government. TCS, or tax collection at source, needs to be made when the amount payable to the account of the supplier is credited. Or when the payment is being made to the supplier, in cash or by any other means, whichever is earlier. 
  • Based on their turnover, tax exemption will be available but it looks like that the GST will still need to be fetched at source by the various ecommerce suppliers. So, even if the turnover does not exceed the threshold under which there is exemption,  the small suppliers will still need to do it. There's another area of grey here: it is not clear whether the refund of the tax paid will be made available to the small players in the sector. 
  • TCS has to be collected by an ecommerce player at the time of credit of amount to the supplier, as pointed out earlier, but for players such as Ola and Quickr - who do not receive any payment or do not act as a payment pass through - there is not any carve-through provided. In that case, such operators can smoothen the progress of supply, with the payment made directly from the customer to the supplier. They only act as a medium and hence do NOT need to comply with the GST compliances. That despite them being covered in the definition of an 'electronic commerce operator'. 

Key issues

  • Higher compliance costs 

The GST law, when in force, will force every ecommerce player to collect tax at source and so deposit the applicable GST when payment is being made to the supplier. This will increase the compliance burden on many of the players as they work with a large number of vendors. Previously, ecommerce players used to be treated only as service providers and hence needed to comply only with a central service tax legislation. But once GST will be in full force, ecommerce players, in addition to the central service tax legislation, will also be needed to undertake additional compliances of the States their supplier will be located in. 

  • Taxation of stock transfer

GST says that under its regime, certain transactions will also be considered as supplies. So, subject to GST, intra-state and inter-state stock transfers, between any two branches or any two warehouses of a single e-commerce entity, would be considered as supplies irrespective. Even though the tax paid will be available as credit, it may cause cash blockages. Like consider this: in case large quantities of goods are stock transferred, tax liability would arise first of all which can be counterbalanced only at the time of the final supply, causing a blockage in the cash flow. 

  • Credit available only on tax payment 

Credit, GST proposes, can only be asserted on the taxes which have been paid to the credit of the government. 

  • Valuation issues on discounts/incentives to continuous 

GST law suggests that the 'transaction value' is the total value of the goods and services in question. When it comes to discount's inclusion or exclusion, the case depends on the category it falls into. 

Discounts have been divided as pre-supply discounts and post-supply discounts. As is obvious, pre-supply discounts are those discounts which are allowed before or at the time of the supply. These will not be a part of the 'transaction value'. Post-supply discounts are allowed after supply and need to be included in the 'transaction value'.

Cash backs and promo codes fall in post-supply discounts but they have not been clearly addressed to. 

Conclusion

Though the burden of compliance increases manifold, there are some significant advantages:

  • No cascading taxes

When it comes to cross-utilization of credits, electronic commerce players will benefit. Right now, the traders are denied credit of service tax paid on input services - say warehousing or logistics or commission of market place. Service providers are not allowed to claim the credit on VAT that they paid on goods used for the output services. This leads to a significantly blocked input tax cost for this sector. And this because the VAT is applicable to the output side, where as most input costs are services. GST will effect a hassle free transfer of credit across supply chains, resulting in major cascading of taxes, resulting in a lowering of the overall cost of supplies. 

  • Consolidated tax rates

In the present regime, differential rates of VAT are applicable for the same goods across different states. The VAT rates are further split to make it all the more complex. This often leads to disputes because there is no clarity. In the GST regime, both central and state rates are to remain uniform, simplifying things majorly.  A lesser number of disputes is always welcome. 

So, to conclude, it is welcome that the GST Act has led to the official recognition of the e-commerce sector in more ways than one, but a lot needs to done to iron out the flaws - glaring flaws - that will pop up during the execution. The sooner, the better.

 

Impact of GST on e-Commerce Sector

2017-04-12