Indirect taxes and ecommerce: the complexities in the digital tax landscape

Ecommerce is undoubtedly a revolutionary innovation in the conventional way of doing business and has provided new opportunities for growth and development of the retail economy. India is expected to become the world’s second largest ecommerce market by 2034.

Given its significance, it's important to understand the complexities in the digital tax landscape and how indirect taxes impact ecommerce.

Business models

Under the GST laws, a supplier of goods or services is required to discharge GST liability on taxable supplies made by it. The transactions carried out in an ecommerce transaction involves a supplier of goods or services, a customer, and the platform of the ecommerce operator (ECO). Further, to physically deliver the goods at the customer’s doorstep, a delivery agent is also involved. 

There are primarily two business models followed in ecommerce. First is the inventory-based model where the ECO itself is the supplier of goods and services to customers on a principal-to-principal basis (P2P). In this model, the ECO maintains an inventory of goods/ services and supplies it further to customers on a P2P basis. The invoice is raised by the ECO on the customer directly against receipt of consideration, and GST is also deposited with the government by the ECO.

The second model is the market-place model, where goods/services are supplied directly by the vendors to customers over the internet platform provided by the ECO. In this model, the ECO collects the entire consideration from the customer and remits it to the vendors after deducting its commission and separately charges convenience fee from customers for facilitating the supply. 

Thus, the ECO raises an invoice on the supplier towards commission charges and another invoice on the customer towards convenience fee. GST is charged on both the invoices and is deposited with the government exchequer by the ECO. Separately, the supplier deposits applicable GST in relation to its supply made to the customer.

We have seen that, in ecommerce transactions, usually complexities related to valuation of supply, GST rate, and place of supply arise in the business transactions. These are major areas of concerns and can be simplified. 

For instance, tour operator ECOs may be allowed to facilitate the supply of flight bookings, hotel bookings, cab booking, visa services etc in separate transactions or they can provide all the above services under one umbrella on a P2P basis to customers. Further, with respect to food delivery ECOs, ambiguity on issues exist–such as whether delivery of food at doorstep qualifies as a restaurant service or not and whether delivery services are provided by food delivery ECOs or by delivery agents independently, and they must be clarified. 

Recently, GST intelligence has initiated investigations on food delivery ECOs for non-payment of GST on delivery fee charged from customers. However, there are other issues that require clarification from the tax authorities so that this line of business is not entangled in unnecessary litigation.

Applicability of Section 9(5) of CGST Act

Section 9(5) of the CGST Act provides that liability to pay GST in case of certain notified services (restaurant services, housekeeping services, accommodation services, and passenger transport service) falls on the ECO who shall be liable for paying the GST in relation to the supply of such services. 

In this case, there is ambiguity in determining whether an internet platform created for providing information technology (IT) related services to integrate suppliers and customers on one single platform would also constitute the services of an ECO or not. Many IT platforms have sought clarifications on this issue through various advance rulings. 

The Karnataka Appellate Authority for Advance Ruling (AAAR), in the case of M/s Opta Cabs Pvt Ltd where booking of cabs was done through the IT platform and actual service supplied by the cab owner for a consideration, it has been ruled that the ECO is required to discharge GST on such passenger transport services in terms of Section 9(5) of the CGST Act. 

Further, contrary to the above, the Karnataka Authority for Advance Ruling (AAR) in the case of M/s Multi Verse Technologies Pvt Ltd,  had ruled that supply of services is actually by the cab driver through the IT platform of the ECO to the end customers; accordingly the ECO is not required to discharge GST in terms of Section 9(5) of the CGST Act.

In another AAR, in the case of M/s Humble Mobile Solutions Private Limited, it was ruled that services provided by listed drivers on the platform to customers is on P2P basis and does not qualify as services covered under Section 9(5) of the CGST Act. Similar views have been taken by the said advance ruling authority in the case of M/s Juspay Technologies Private Limited. Hence, the issue still needs clarity to avoid future litigation.

Taxability of vouchers

ECOs issue e-vouchers/gift cards, and the customer can redeem such e-vouchers/gift cards from the value of supply. Earlier, the Tamil Nadu AAAR, in the case of M/s Kalyan Jewellers India Ltd, ruled that the time of supply of the e-vouchers/gift cards issued to the customers shall be the date of issuance of such vouchers. 

Another advance ruling by the Karnataka AAAR in the case of Premier Sales Promotion Pvt Ltd ruled that vouchers are goods. Accordingly, GST would be charged on the supply of vouchers. However, the industry has maintained that the vouchers should be taxed only at the time of redemption at the applicable GST slab on the goods or services purchased and not at the time of issuance as it leads to double taxation.

The issue that arose in the beginning with AARs was related to the time of supply of vouchers. However, in both the matters, Karnataka High Court and, recently, the Madras High Court took a different stand and held that e-vouchers/gift cards are actionable claims, which constitute as neither supply of goods nor supply of services, and are thus outside the purview of GST. 

Thus, to prevent the confusion on the taxability of vouchers, clarification on whether they qualify as goods or actionable claims should be given on priority basis; accordingly the time of supply for levy of GST must be determined.

Discount more than earnings

Sometimes the discounts, incentives and cashbacks provided by the ECO to the customers in a particular transaction are more than the value of the commission and convenience fee earned by the ECO in that transaction. Hence, the total discount becomes more than the outward supply of the ECO for the given transaction. 

Since no GST is paid by the ECO on such transactions, many a time the GST department disputes that such discounts, incentives and cashbacks are marketing expenses and cannot be adjusted against outward supply. Hence a question is raised on the valuation adopted for discharging GST; clarity on this should be provided by the GST department.

The government is committed to promote ecommerce and digitalisation and has made several announcements for developing digital infrastructure and digital payments in the previous Union Budget 2023-24. Thus, it becomes imperative that the government issues clarifications on issues perturbing the ecommerce business, which has great potential in the acceleration of the Indian economy and also the revenue of the government exchequer.

Smita Singh is Partner - Indirect Tax, Customs and Trade at S&A Law Offices. Prateek Sagar is Senior Associate for Indirect Tax at S&A Law Offices.