E-commerce (electronic commerce or EC) is the buying and selling of goods and services, or the transmitting of funds or data, over an electronic network, internet or online social networks. These business transactions occur either as business-to-business, business-to-consumer, consumer-to-consumer or consumer-to-business. The terms e-commerce and e-business are often used interchangeably.
Recently, the draft of the Goods and Services Tax (GST) law was released by the finance ministry. While there are no major surprises in the structure of the law from what was earlier envisaged by the Empowered Committee’s discussion papers, the e-commerce proposals come as a bit of a surprise for the industry. The model law proposes that e-commerce operators, or ‘marketplaces’ as they are known in the industry parlance, would be responsible for collecting tax at source from sellers at a rate to be notified.
Marketplaces are intermediaries between buyers and sellers. They provide a platform for sellers to showcase their products to potential customers. Pure marketplaces do just this and earn fees for their services. Some others provide value-added services to their sellers, undertake to fulfill orders placed on their marketplaces and ensure speedy delivery to customers. It is important to understand the mechanics of transactions occurring on a marketplace to appreciate the implication of this proposal. Customer ‘X’ places an order with a seller ‘Y’ on a marketplace. Y can either choose to deliver the goods to the customer himself or avail services of the marketplace to do so. In either case, the sale transaction always happens between X and Y. The customer either pays at the time of purchase or pays on delivery. The marketplace settles the seller’s account after deducting fees for its services. The responsibility of paying VAT/CST to the government is that of the seller.
The proposal in the GST law is to make marketplaces collect a portion of the tax from the sellers and deposit it with the government. This is not the first time that tax authorities have tried to differentially tax marketplaces. The Karnataka government initially tried to treat marketplaces as agents of sellers and make them responsible for payment of VAT on their behalf and then proposed a 1% tax deduction at source. Both these proposals were not carried through after industry opposition. Reviving these proposals in a somewhat modified manner is rather unexpected to the operators at a time when ‘ease of doing business’ is the key to success.
Impact on E-commerce
Currently, the federal indirect tax structure with different tax regimes in various states has led to confusion and uncertainty on the tax treatment of online marketplaces and aggregators. It is felt that clear and defined laws will help remove the ambiguity that currently exists in this sector, and insulate such operators from so fast changing laws and arbitrary levies imposed by State governments.
The Model GST Law has incorporated a separate chapter on e-commerce transactions.
Who is covered?
The Chapter defines an 'electronic commerce operator' to mean a person who owns, operates or manages an electronic platform engaged in facilitating supply of any goods/services or in providing any information or any other incidental services. The term 'aggregator' has been separately defined to mean a person who owns and manages an electronic platform to enable a customer to connect with persons providing a service under the brand name of the aggregator. An aggregator (as defined) in the Model GST Law, however, has not been specifically subsumed in the definition of an e-commerce operator.
In my view, though an 'aggregator' has been separately defined in the chapter, it could be concluded that an aggregator should be covered under the definition of 'electronic commerce operator' given that an aggregator is also a person who maintains or operates an electronic platform for facilitating supply of services. The only distinction between an aggregator and other e-commerce operators is that an aggregator provides underlying services under his brand. Consequently, an aggregator would also be required to adhere to the process of tax collection at source and other requisite compliances in the Chapter.
Aggregator: means a person, who owns and manages an electronic platform, and by means of the application and a communication device, enables a potential customer to connect with the persons providing service of a particular kind under the brand name or trade name of the said aggregator.
Electronic commerce operator: shall include every person who, directly or indirectly, owns, operates or manages an electronic platform that is engaged in facilitating the supply of any goods and/or services or in providing any information or any other services incidental to or in connection there with but shall not include persons engaged in supply of such goods and/or services on their own behalf.
Both these definitions are as per the model GST law released by the government of India.
The major difference between the two is that while an aggregator(Ola, Oyo rooms) only connects the customer with the supplier/service provider, whereas an e-commerce operator (Amazon, Snapdeal) facilitates the entire process of the supply of goods/provision of service. So Flipkart not only connects the customer but also provides all information about the product and looks after the delivery and refund process. Hence an e-commerce operator is larger than an aggregator.
Who is not covered?
Online retailers who supply goods/services on their own behalf are not covered under the definition of electronic commerce operator and therefore the process of tax collection at a source and other requisite compliances in the Chapter will not be applicable.
The e-commerce sector in India which took baby steps until about a couple of years ago is in a galloping mode today. The growth of the e-commerce sector in terms of revenue and shipments has been nothing but phenomenal. The e-commerce sector has successfully managed to capture the brain and focus of the consumers like never before and with an unprecedented growth trajectory expected to continue, is predicted to be the next BIG Industry.
Growth of any business is good news for the economy and especially the tax authorities. E-commerce sector, with its ever increasing number of transactions in goods & services, is a waste land for sowing the seed of indirect taxes. While it is good for the government to expect an increase in income by collecting tax through growing businesses, the tax laws should also support the businesses with a clear vision on taxation matters and ease of doing business at the maximum possible level. Unfortunately, for the e-commerce sector, the indirect tax laws in India have been more of obstacle than a driver for growth till date.
Limitations under current scenario
1. E-commerce sector dealing in trading of goods have experimented with various business models i.e. from 'stock-and-sell' model to ‘market-place’ model. They now faced more complex tax framework involving VAT / CST, excise, and / or service taxes. However, the indirect tax laws have not been able to recognize and accommodate the evolving business models and hence have become an impediment in the operation of the newer market-place or services model.
2. E-commerce sector face difficulties to categorise their offerings into 'goods' or 'services' for charging either value added tax (VAT) / Central Sales Tax (CST) or Service Tax. This situation further deteriorates in the case of digital downloads involving software, music, e-books etc. wherein it becomes tough to assume whether the transaction is for sale of goods attracting VAT / CST or a provision of service that should be charged to service tax. Both VAT and service tax authorities claim their right over such digital transactions which lead to disputes and never-ending litigations.
3. Inter-state movement of goods from one state to another is a nightmare for an e-commerce operator. The requirement of statutory forms, way-bills, road-permits etc. and the recently imposition of local registration requirements for the e-commerce market places by certain States under the VAT / CST legislations for entry or sale of goods into the state has made the inter-state transaction a strange experience for the sector.
4. The non-fungible VAT and service tax results in significant non-recoupable tax cost impact for the e-commerce sector.
5. Present different tax laws in India are also not successful in providing enough clarity on taxation and documentation management for typical e-commerce sector transactions like e-wallet (advance deposits by consumers), cash-on-delivery (COD), gift vouchers, drop-shipment (direct delivery of goods from the e-commerce company vendor to the e-commerce company customer) etc. Absence of specific direction on treatment of the above transactions under various tax legislations has led e-commerce sector to adopt diverse practices.
Goods & Services Tax (GST) which would replace the current indirect tax regime and expected to be implemented in India from 1 April, 2017, could hold the key to unlock the issues faced by the e-commerce sector.
Key Advantages of GST
Though the roll-out of GST may lead to greater compliances for e- commerce players, its implementation have two major benefits to e-commerce players.
1. Removal of cascading taxes: The major advantage of GST to market place players is that it will remove the restrictions on cross utilisation of credits. Currently, traders are denied credit of service tax paid on input services such as warehousing, logistics, commission of marketplace and service providers are not allowed to claim credit of VAT paid on goods that are used for providing output services. This cascading results in a significant blocked input tax cost for this sector since VAT is applicable on the output side, whereas most input costs are services.
The GST model will therefore facilitate seamless credit across supply chains, with tax set-offs available across the production value-chain, both for goods and services. This will result in reduction of cascading effect of taxes, therefore bringing down the overall cost of supplies. It is hoped that this cost benefit would be ultimately passed on to the customers or help in increasing the profits of the companies.
2. Consolidated tax rates: Currently, there are differential rates of VAT for the same goods in different States. There are a lot of classification disputes in current scenario. However, GST rates at both the Central and State level are expected to be uniform and harmonised which would drastically reduce disputes among tax authorities and e-commerce players.
For e-commerce companies, which are forefront in the startup boom in the country, the regime is likely to increase the compliance burden. Sandeep Ladda of PwC says that since the GST is a destination tax, the compliances will be the e-commerce website's responsibility and not the sellers'. So the work for these companies will increase.
Following are the key impacts for an e-commerce company on account of GST
Pricing impact: The output rate of tax could be higher for the company compared to the current service tax rate. However, the companies should have a higher credit pool than they do in the current regime, which could reduce the prices of their services.
Place of supply in case of B2C transactions would be the location of the service provider.
Place of supply in case of B2B transactions would be the location of the service recipient: It will be important to examine whether there would be rules to define inter-state service or intrastate service. This could be important to understand additional compliance requirement for e-commerce companies. For instance, in case it is stated that e-commerce companies would need to pay applicable CGST + SGST in the state where the service recipient is located, it would result in e-commerce companies taking registration in almost all the states where the service recipients (i.e. vendors) are located.
Compliance requirement: Currently, e-commerce companies discharge their output service tax liability through centralised registration. Under GST, the centralised registration option may not be available. Hence, e-commerce companies would need to as such obtain registration in each state where they have their place of business, resulting in increased compliances.
Industry experts said the major pain point would be tax collection at source, which would create a rift between sellers and e-commerce companies. Tax collection at source is not there for any other sector, why only for e-commerce? According to the GST Bill, any payment made to a supplier would be subject to tax collected at source at the notified rate. This may disrupt the relationship between sellers and e-commerce companies.
Top Notch e-commerce players like Flipkart, Snapdeal and Amazon have demanded exemption from GST. They plea that we are only market place between supplier and customers and are liable to pay GST on the service income. They say that they don’t make money from the sales. When asked why they command such high valuation, they replied that it is because of earning from the advertisements on which they pay service tax. Google India CFO also met the top Indian tax officials and stated the difficulties in the state wise segregation for the cloud services. He said that state wise registrations will lead to compliance issues.
Industry stakeholders have said the GST Bill puts the compliance burden on e-tailers as they have thousands of sellers on their platforms. “In addition, small sellers will have cash-flow issues as they will have to claim refunds for tax paid on inputs, which e-tailers will not be able to account for,” said a senior official of an e-commerce company.
I have analysed the e-commerce business in details. You all will agree that It offers good services from the customer point of view. Customers are in safer zone with 15 days refund policy if buying from trusted market place.
These e-commerce companies are totally working like other dealers. They earn profit margin with every sale. They even offer secondary packing services, pick the product and supply goods to the end customers. It is same as other dealers do. Aggregators can say that they are not sellers but e-commerce operators are surely working like dealers and should be covered under GST. As far as aggregators services are concerned though they don’t sell anything but are subject to service tax. As service tax will be merged into GST so they are also bound to come under GST. As far as small dealers are concerned, most of them are working online trading without VAT numbers, thus selling goods of imports or goods of not so good quality or small amount. These dealers are added by online marketers just to enhance the visibility of their sites and increase google ranking. GST will go a long way in cleaning the system.
As far as compliance and other issues raised by e-commerce operators. I think it is not more than fake. Software developer will take care most of these issues.
I conclude my article by quote of Vijay Shekhar Sharma, founder and CEO of Paytm.
“Even though GST means new ways to calculate tax and some bit of extra work in administration of business, I think it is great for online businesses because it brings clarity and tax obligations. Surprisingly, GST will also open new markets for online commerce because, today, due to complexities of entry tax and other processes, customers in some states cannot order everything from online shopping destinations.”
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