E-commerce companies and, especially, e-traders are facing a global problem of incurring huge losses. In India and globally, e-commerce companies have been trading at suicidal prices; they’re targeting to build their customer base and develop their infrastructure and logistics. These companies are involved in furious price wars, selling at rock bottom prices to attract more and more customers. This means selling at prices lower than their purchase price. But how long is this feasible is the big question?
Image credit "Shutterstock"
In the long run, companies with deeper pockets and big ticket funding from VCs will win the battle.
The Modi government is coming up with the all-important budget on 28th of February, 2015. The First Budget was not judged much by the industry as the new government had very less time to work on it. However, this time, they’ve had ample time to fasten the loose ends and come up with a satisfactory solution to the problems of the e-commerce industry. Some of the major issues faced by e-commerce companies, for which they expect a solution in this budget, are discussed below.
E-commerce companies require more and more funding options, because, after some time, most of companies will shut shops and look elsewhere. The last man who stands will benefit the most. Amazon has being doing this for a very long time in all markets it has entered. At that time, weaker companies will be wiped out and the remaining will enjoy monopolistic benefits. There will be huge barrier cost for new entrants and penetration would be extremely tough.
Right now, the Government of India allows 100 percent Foreign Direct Investments in single brand retail, and up to 51 percent FDI in multi-brand retail.As per the commerce ministry, the same FDI norms are also applicable to all e-commerce companies.
E-traders, most of whom are multi-brand retailers, expect 100 percent FDI for e-commerce companies, so as to enable them to build logistics faster and better and get easier funding and allow them to take the race head on.
E-traders are selling goods at prices lower than the purchase price. Over and above this, they’re incurring expenses on warehousing, shipment and operations. The predatory pricing policy of bigger e-commerce companies have made smaller e-commerce companies, and even retail traders, bleed financially. Retailers are already under pressure due to ever-rising cost of real estate and man power. They’re pressurizing manufacturers to put an end to online availability of products at prices even lower than the purchase price of the retailers.
“The Confederation of All India Traders” and other organisations have complained to the commerce industry to come out with a policy. They want the industry to probe how e-commerce companies are offering huge festive and other discounts, wherein, the offered price is lower than the purchase price. There are also complaints of reviewing the business model of e-retailers to know how such discounts are being offered. Predatory pricing is anti-competitive, and may lead to de-facto monopoly, which may not be acceptable.
So a well-planned policy for e-commerce and online business will give the industry a much required boost and jump.
Taxation in India are of two types: Direct taxes, mainly consisting of income tax, and indirect taxes, consisting of service tax, VAT, excise and customs. As of now, income tax is not an issue for e-commerce companies, and there are settled laws uniformly applicable to all e-commerce companies.
The problem lies with indirect taxes, mainly VAT/CST &service tax. VAT/CST comes under the ambit of respective state governments, and service tax comes under the ambit of the central government. While there are several business models followed by the e-commerce companies in India, they can be broadly classified into “inventory-based model” or “market place model”. In case of the inventor-based model, the company engages in commerce directly. Conversely, in case of the market place model, the e-commerce company facilitates the provision of e-commerce transactions by acting as platform in return for a commission from the sellers of the goods/services. From the perspective of an e-commerce company, in case of the inventory based model, VAT or CST, as the case maybe, is levied on the sale of goods; whereas, in case of the market place model service tax is levied on the commission earned.
A variant of the market place model is the “ fulfilment model,” wherein, apart from acting as a facilitator, the e-commerce company also provides services such as warehousing, delivery and packing.
In this type of trade, the e-commerce companies being facilitators have to pay service tax on their commission income and the sellers have to pay VAT/CST on the sales of goods. However, when the seller and warehouse of the e-commerce company are situated in two different states, additional VAT is demanded by the state in which the warehouse of the e-commerce company is situated. This leads to either loss to the state, where the warehouse is situated, or double taxation on the part of the e-commerce company.
With the advent of multiple e-commerce ventures in India, the government is finding it difficult to adapt its existing rules to meet the requirements of newer kinds of businesses – which often uses different structuring jugglery to circumvent the current legal frameworks. The Finance Ministry and the Government of India is coming with a consolidated Goods and Service Tax along with IGST mechanism for handling inter-state trade and commerce.
It is expected by the e-commerce industry that the Budget 2015 shall address these issues and facilitate more and more e-commerce business in a hassle free manner.
Businesses feel free to visit Taxmantra.com for comprehensive accounting, legal, regulatory, taxation and other compliance related assistance. Feel free to write to us at firstname.lastname@example.org.