Will the new TCS norms spell tax confusion for online sellers?

Will the new TCS norms spell tax confusion for online sellers?

Monday October 01, 2018,

6 min Read

Tax collected at source (TCS) comes into effect today. While it promises to plug evasion loopholes, it poses quite a few challenges for sellers on ecommerce platforms. The issue gets more complicated when ‘easy returns’ policies are thrown in the mix.

The Ministry of Finance recently announced that ecommerce companies will have to deduct one percent tax while making payments to their sellers, effective today. The decision to roll out tax collected at source (TCS) saw ecommerce marketplaces and small sellers express their unhappiness with a move that they felt would encourage offline selling.

On its part, the government move is expected to prevent tax evasion, at least among sellers doing business online. A recent report by industry body Nasscom and PwC India said India’s ecommerce market is estimated to surpass $100 billion by 2022, reason enough for the government to tap it as a tax source. TCS is similar to tax deducted at source (TDS) under the value added tax (VAT) regime. The tax will track unregistered dealers and suppliers, and cases where dealers are not paying GST.

Speaking about the benefit of TCS, Amit Sarkar, Partner and Head – Indirect Taxes, BDO India, said, “An online seller can sell an item and charge GST, and not necessarily deposit the tax to the government. By introducing the TCS rules, this loophole has been closed.”

The Internet and Mobile Industry of India (IAMAI), though, disagreed. In a statement, it said, “Online marketplaces, as recognised by the IT Act 2000, are intermediaries, only providing a technological platform and are not actually engaged in the act of retail trade. Mandating technological platforms to collect GST is a contradiction of the intermediary role played by such platforms.”

It added, “An immediate notification with less than a month for compliance is too short a notice. IAMAI would like to highlight that implementation of TCS requires not only adjustments on behalf of technology platform providers, but also adjustments for the numerous on-boarded sellers. Forceful implementation of TCS will create chaos for the seller community and be a major roadblock for ecommerce transactions.”

The government directive comes just as the country’s largest players, Amazon India and Flipkart, are preparing for their annual festival sales. Amazon India declined to comment on the government’s move to impose the tax, and Flipkart didn’t respond to an emailed questionnaire. Other stakeholders have had mixed reactions to the notification.

A spokesperson from the All India Online Vendors Association, which represents 3,500 sellers, said, “Ecommerce sellers have welcomed the spirit of TCS provision. However, the first few months will be crucial to see how data discrepancy between marketplace data and sellers’ data is handled. If sellers with excess credit of input tax credit (ITC) can be allowed to apply for exemption, it will save their money being stuck in refunds. Sellers are welcoming the implementation of TCS, which was long awaited."

He, however, added that data discrepancies might arise when goods are returned, and that the TCS may stifle ecommerce operators’ easy return policies.

Challenges to new business models

The new TCS rule might also act as a deterrent to the ‘app-in-app’ ecosystem, unless rules are made considering the modern dynamics of ecommerce retailing.

Indian ecommerce operators and fintech companies, especially, have been trying to create an open ecosystem, either by partnering with other ecommerce operators or hosting micro apps inside their apps like what PhonePe has done with redBus, or Flipkart is doing with MakeMyTrip.

Mini apps within an app offer users quick access to other apps without having to download them, and allows the hosting app platform to offer multiple services/apps. This new model will, however, face some challenges when it comes to TCS.

Anita Rastogi, Partner, GST and Indirect Tax, PwC, said, “There are transactions where there are two ecommerce operators involved (one which contracts with the supplier and second which contracts with the customer). The department has now clarified that the ecommerce operator who contracts with the supplier has to deduct the TCS.” The second ecommerce operator also has to complete TCS compliances and this might stifle partnerships and collaborations between ecommerce operators.

“Foreign ecommerce operators have to either obtain a registration in every state or appoint an agent on their behalf. This may trigger other issues,” points out Suresh Nandlal Rohira, Partner (Leader GST and Customs), Grant Thornton LLP.

Administrative compliance challenges

“While there will be no impact on the digital transaction vis-à-vis cash transaction (CoD), there are four areas that will be affected. The first is that administrative compliance increases for ecommerce players. They have to get registered in every state, and will need an address or an authorised signatory,” says Amit.

“The second issue is about third-party resellers who will be impacted by their cash flow. Now instead of getting Rs 100 (for example) in a transaction, he will get Rs 99. The government is expecting better compliances from resellers.”

The e-commerce business model, Amit points out, is one of volumes, and not margins. With the indirect tax, online buyers would normally bear the incidence of tax. So, there is a possibility of prices getting jacked up by sellers, who wouldn’t get reasonable profit after doing the additional compliance work.

The third issue, Amit explains, is of additional returns that marketplaces have to file, not only on the commission they earn but also on the gross sales on their platform. And here’s not forgetting the massive amount of data these ecommerce operators have to manage for tax compliance.

“The fourth issue is that many of the small resellers, because of margin issues, may prefer not to sell online.”

The process of TCS deduction

The Reserve Bank of India allows ecommerce companies to open bank accounts, called nodal accounts, with banks for payment settlements. These accounts require G+2 settlement – the money collected from customers has to be deposited into these accounts and have to be passed on to the seller within two days.

After the money collected from customers, the ecommerce operator will have to deduct one percent TCS, and remit the balance to the sellers. The TCS will be deposited with the government along with seller’s name and details.

In its monthly returns, a seller would claim the transaction was online, and furnish details along with the GST number, which will then be matched with the returns filed by the ecommerce operator. And after reconciliation, the amount collected from the ecommerce operator gets adjusted with the seller’s tax liability.

The complexity

There are expected to be complications, experts warn, especially in cases where values by the seller and the ecommerce platform do not match. The bigger concern is for items returned by customers.

Harminder Sahni, founder and MD, Wazir Advisors, a retail consulting firm, said, “The new rule will create disruption for at least six months or a year. Compliance cost plus the one percent TCS will add up to the business cost of sellers. But I hope that eventually, things will settle down.”

Like any new system, one needs to wait and watch how the system pans out, and how smoothly issues can be resolved. This is the government’s attempt at bringing in everyone under the tax net, but only time will tell how good the compliance turns out to be.