GST will expand e-commerce say Flipkart and Amazon but an association slams the draft bill as a ‘Killer App’

India’s two principal e-commerce companies have welcomed the draft Goods and Services Tax (GST) bill, as it will allow them to reach out to more customers by ending the scourge of entry taxes which states levy on goods entering their borders but the Internet and Mobile Association of India (IAMAI) has slammed it as ‘a killer app’.

YourStory.com will not attribute views to either Flipkart or Amazon, because one of them sought anonymity. While they were happy that the bill had defined ‘marketplaces’ and ‘aggregators,’ they were anxious about tax collection at source (TCS), which they felt would not only block the working capital of vendors selling through them but might entangle them in needless litigation. They felt TCS was discriminatory as it applied only to online sellers and not to brick and mortar ones.

The two majors have 85,000 to 90,000 vendors each and their numbers are growing. Each of them does millions of transactions a month. Collecting a small tax on each sale is not much of an issue, a director of taxation said. Programmes can be written to enable such deduction. But they cannot assure that tax deducted and deposited will be reflected in the vendors’ accounts with the government. If there are mismatches, the vendors will blame the tax deductors and might even proceed against them legally. IAMAI believes the reversal of tax collected at source on goods returned will add a layer of complexity. It might affect customer acquisition, if sellers are deterred from allowing goods to be returned at all.

The government is outsourcing tax collection to e-commerce companies, said Anita Rastogi, tax partner at PriceWaterhouseCoopers, a consultancy. E-commerce players say they are willing to cooperate with the government by sharing data. With states like Delhi and Rajasthan, they were providing vendor-wise break-up of sales. They also verify the authenticity of VAT registration numbers given by vendors as part of Know Your Client (KYC) norms. They could provide information ‘at a more granular level’ to prevent evasion of GST so long as they were spared the actual collection of a part of it.

The bill defines an ecommerce operator as one who directly or indirectly owns, operates or manages an electronic platform that is engaged in facilitating the supply of any goods and services or providing information that enables the transaction. This definition applies to marketplaces like Flipkart and Amazon, who do not own goods, but do the match-making between buyers and sellers, for which they charge a fee.

Flipkart and Amazon are marketplaces not for reasons of taxation. The route has been forced on them because only those online sellers can get foreign direct investment who sell either to other businesses (B2B) or act as matchmakers between buyers and sellers without themselves owning the inventory. In countries where there is no such restriction, Amazon, for instance, follows a hybrid model, selling both own and outsourced goods.

The bill defines an aggregator (Uber, Ola) as one who owns and manages an electronic platform and enables a potential customer to connect with service providers under their own brand name. These services are regarded as supplied by the owners of the brand name.

IAMAI finds the definition inadequate. Naukri.com is an aggregator (of jobs) like Uber or Ola, it says, but unlike the taxis which sport a common brand name, the job givers are individual companies who are distinct from Naukri.com. Another quibble is that it applies to providers of services. What about aggregators of sellers of goods like Olx and Quickr, it asks.

A more serious, flaw, in IAMAI’s view is the lack of distinction in the draft GST bill between digital intermediaries like internet service providers and other intermediaries like commission agents and brokers.. They are all regarded as agents. As such digital intermediaries lose ‘safe harbour’ protection given to them by the Information Technology Act, 2000, which says ISPs are a platform for hosting and transmission of content and cannot be held responsible for the uploaded or transmitted content.

Will GST reduce prices? It should if sellers pass on some of the savings. It also depends on the GST rates. Currently, offline retailers pay 15 percent service tax on rent, which is a big item of cost for them, but they cannot set it off against VAT (which is a tax on goods). With GST they can as it is a combined goods and services tax. Such gains will also be available to online sellers.

Much will depend on the GST rates. Currently, there are quite a few goods where the combined VAT and service tax rate is 17 percent. For a majority of goods the combined rate is 27 percent. ‘We would be very happy if the GST rate were 18-20 percent’ the tax director quoted earlier said.

Logistics companies like the Gurgaon-based Rivigo say they will be required to set up fewer warehouses. Currently, state governments try to discourage online purchases from other states to minimize revenue loss (as VAT is a origin based tax). They charge an entry tax to make up.

Uttar Pradesh has increased the degree of difficulty for online purchases by requiring buyers to furnish a VAT form to delivery agents for goods sourced from other states. The rule is not applicable for sales made by vendors based in the state or those who have a warehouse there. Amazon has therefore set up two warehouses across the Delhi border in Ghaziabad. Since GST is a destination-based tax, states will not discriminate against online commerce. The decision to locate warehouses will be decided by business need and not tax compulsion.

To sum up, GST will certainly aid e-commerce but a reduction in prices will depend on rates and the willingness of vendors to pass on some of the tax offsets. It would be best if the government stuck to its core competency of collecting taxes instead of palming if off. Asking for information on sales made by each vendor would be better alternative to requiring e-commerce companies to collect a part of the GST. The definitions should be expansive and not restrictive.