GST in India: A benefit or barrier for the e-commerce sector?

With the inclusion of retail entrepreneurs in the ambit of GST and the introduction of specific provisions for e-commerce companies, certain areas of GST will impact the e-commerce sector.

Every company in India, be it a multinational company or a small/medium enterprise, is gearing up for the implementation of GST. The e-commerce sector would follow suit in its preparation by focusing on provisions specific to this sector in the GST law.

The success of the e-commerce sector is largely dependent on the increasing number of retail entrepreneurs, who fall in the unorganised retail sector category. The government has included such players in the ambit of GST with an intention of broadening the tax base and has introduced specific provisions for the e-commerce companies. Here are some of the key areas of GST that impact the e-commerce sector:

1. No trade barriers—one nation one tax

In the present regime, there is no uniformity in the tax rates among the different states and therefore every state determines its own tax rates specific to the products. For example, a mobile phone in state 1 is taxed under VAT at five percent and in state 2 at 14.50 percent. As a result, the sellers in state 2 would not want to sell locally but would prefer to sell from state 1, resulting in loss of revenue for state.

E-commerce operators have set up distribution centres only in certain locations and collect the VAT applicable on sales made from such centres. In order to compensate for the loss of VAT revenue, many states have recently imposed entry tax on goods coming from other states, which discourages sales made from other states. The entry tax acts as a trade barrier, restricts free movement of goods from one state to another and increases the cost for traders.

However, such trade barriers will cease to exist as GST is inclusive of entry tax. The destination state earns the revenue from GST on sales regardless of where the sale was made. Further, there is no rate arbitrage under GST because the classification of goods and rate of GST is common across states.

1. Tax collection at source (TCS)

It is mandatory for all e-commerce operators to collect tax at the rate of two percent as TCS on the net value of sales made by suppliers through e-commerce operators. Such TCS has to be deducted in each state and deposited accordingly. This brings in significant compliance challenges to sellers and may discourage sales through marketplace model. However, this may not be applicable for inventory based models, where the e-commerce operator makes the sale from its own inventory. The key purpose of this provision is to encourage compliances under GST and provide a mechanism for the government to track suppliers who sell through e-commerce operators.

1. Increase in compliances for e-commerce operators

The e-commerce operators should report all supplies made by the seller and the TCS collected thereof on a monthly basis. The sales reported by the e-commerce operator will have to match with the sales declared by the supplier himself at the end of every month, and any difference will be added to the turnover of the supplier and consequently be liable to discharge GST on such additional turnover.

The e-commerce operator has to report the product/service code and the applicable rates for each item level individually. This requires them to map every sale done by the dealer and ensure TCS is deducted at the right value. The implementation of compliance is cumbersome for both e-commerce operator and the supplier.

Additionally, the e-commerce operators will have to register in each state and file the reports separately on a monthly basis. This process increases the challenges in compliance and costs of running the business.

1. Mandatory registration of sellers and unavailability of composition scheme

GST mandates that all sellers supplying through an e-commerce operator need to be registered under GST irrespective of the threshold limit of Rs 20 lakh. These sellers cannot opt for composition scheme, where they pay a flat tax at the rate of two percent and do not maintain details of each product sold. In this scenario, it is not feasible for small businesses to maintain a detailed record of purchases and sales and pay higher rate of tax. Because of this, many small retailers may not prefer to work with an e-commerce company, which impacts the business for e-commerce operators.

1. Increase in credits

The GST law has extended the meaning of ‘input tax’ to cover any goods/services used by the company in the course of business, which has widened the ambit of input GST credits. This has removed the requirement to establish the direct nexus of inputs/input services with the final product/service provided by companies. For e-commerce operators and sellers, the unavailability of credit towards excise duty and VAT on goods and service tax on certain services adds to the cost of running the business, which would be avoided under GST on account of increase in credits.

Conclusion

As we can see, the GST law may have a negative impact on the e-commerce sector. Given that e-commerce sector in India is one of the most rapidly advancing sectors and the government is vigorously promoting digitised economy, the introduction of such cumbersome compliances cringes the growth of this sector.

Statutory framework introduced by the government should be towards the advancement of business rather than creating obstacles. The GST law should provide an enabling environment that encourages e-commerce operators and suppliers

Soumya Murthy, Associate – Indirect Tax, PwC has also contributed to this article

In the run-up to one of the biggest tax reforms in the country, the market is abuzz with new rules and guidelines about the Goods and Services Tax (GST). How will GST really impact your business? How will your financial reporting change? Find out the answers to all this and more, directly from industry and tax experts who will share their expertise on YourStory’s new series ‘IndiaonGST’.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)