Pratik Giri, Law Student at National Law Institute University, Bhopal
E-Commerce in India is often referred as the “sun-rising industry”. The growth it has seen in the recent years is not only unprecedented but it is also expected to grow twice of its size within a few years from now. While India stands on the brink of its biggest transformation in the tax reforms- that is the implementation of the Goods and Service Taxes “GST”, its impact on the E-commerce sector are vast. Currently, the indirect tax structure with different tax regimes in every state has led to confused and complex tax treatment of E-commerce Sector. The Model GST Law has incorporated major changes by including a separate chapter on e-commerce transactions. However, the proposed Model GST Law may result in compliance challenges for the e-commerce sector and open up many other issues which would require further clarity. This article tries to understand the effect of transition from the current model of indirect tax to the uniform model given by the GST.
The current E-commerce sector of India is burdened with the plethora of taxes, there are multiple taxes applicable on a single transaction such as VAT, CST, excise, service and TDS. It becomes even more difficult to differentiate between the goods and services when it comes to the products like software download, music, e-books etc. Moreover, to make the matter even more unfortunate, the statutory forms and e-way bills add complexity to interstate transactions. While the current tax regimes have created ambiguities and uncertainties, it is felt that the single defined laws will help in removing these ambiguity and save such operators from the multiplicity of taxing statutes. Hence, the implementation of GST has incorporated a separate chapter on the E-commerce transactions to achieve this endeavor
GST is the biggest transformation in the indirect tax regime in India, which will make India a unified common market with reduced compliance costs and bring in simpler tax structure. It intends to rationalize the current indirect tax regime, by following its motto of “one nation, one tax”, thereby providing a stable economic environment favourable for growth and development. However, with the unifying tax structure, GST can result in the higher compliance challenges and open up certain other issue which would require further clarity.
The model law of the GST defines E-commerce as to mean the supply or receipt of goods and/or services, or transmitting of funds or data, over an electronic network, primarily the internet, by using any of the applications that rely on the internet, like but not limited to e-mail, instant messaging, shopping carts, web services, universal description Discovery and integration (UDDI), File Transfer Protocol (FTP) and Electronic Data Interchange (EDI) whether or not the payment is conducted online and whether or not the ultimate delivery of the goods and/or services is done by the operator. It also suggests that the Ecommerce operator would be responsible for the collection of the tax at source hereinafter referred as “TCS” form the seller. The proposal seeks ecommerce operators or the providers of the platform known as the marketplace, to collect the tax from the seller and deposit it to the government at the proposed rate.
Who will be affected?
The chapter defines the terms “Electronic commerce operator” and the “Aggregator” differently. The former is defined as 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. While the term aggregator is defined so as 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.
Although an aggregator is defined separately, it can be assumed that it is covered under the Ecommerce operator as the aggregator is also a person who maintains the electronic platform to provide the services. The only difference lies in the fact that the latter sells the service under their brand name. Flipkart, Amazon, Snapdeal lies in the former category while the service providers such as Ola cabs, Oyo rooms etc. fall under the latter group. Consequently, the aggregators too have to adhere to the collection of the tax at source under the model GST law.
At the same time, the retailers who offer their own services online are not liable to be covered under the proposed collection of tax at source by the model GST law and the chapter is not applicable on them.
Implications of the GST – Tax Collection at source
Ecommerce operators who facilitate the online platform for the supply of the goods or services will be required to collect the tax at source, which is out of the total transaction amount payable to the supplier, and the collected amount will be deposited with the government. Suppose if a consumer buys a product worth rupees 1000 from the Amazon, and the proposed tax rate under GST is 1 percent, then the Amazon after deducting its service cost, will keep the 1 percent, which is 10 rupees with itself before giving the money to the supplier and that 10 rupees will be deposited with the government. Such deduction is to be made before the amount is paid to the supplier, either in cash or by any other mode.
Apparently, there seems to be a problem with the definition of the ecommerce operator and the application of the TCS provision. For the application of the TCS it is necessary that the transaction amount passes though the ecommerce operator, from which the operator will collect the tax at the time of the credit, but there is no such provision made for the operator who do not receive the transaction amount. In the case of the operators such as the Quiker and the Olx, the operator merely facilitates the meeting of the supplier and the consumer and the payment is directly made to the supplier. Therefore, such operator cannot be expected to be covered under the TCS provision.
Furthermore, there is ambiguity regarding the refund of the tax to the small suppliers. Despite the availability of the tax exemption based on their turnover, it seems that while collecting the TCS, it will be collected for the small suppliers too, even when their turnover does not exceed the threshold exemption. There is no provision regarding the refund of their tax.
Higher compliance costs
In the current scenario, the ecommerce operators merely acts the providers of the platform and have to comply only with the central tax. Under, the GST the tax is based on the place of the service recipient, i.e. the vendors and the ecommerce operators have to register in all the states where they have the vendors in order provide their services and this will burden them with the additional compliance cost.
Moreover, the provision of TCS will add significantly to the compliance burden on the ecommerce operators as many of them have large number of vendors.
Valuation Issues on discounts/incentives to Continue
Discounts are basically divided into two parts, viz., pre-supply discount and the post-supply discount. The discounts which are allowed before or at the time of the supply and are added in the invoice are known as the pre-supply discount and the discount which are given after affecting the supply are known as the post supply discount.
Under the current system, the VAT is imposed on the non-discounted price by the authorities to avoid the disputes. While under the model law of the GST, tax is collected at the transaction value and whether the discounts are included or not depends upon the category under which the discount falls. If the discount falls within the pre-supply category it will not form the part of transaction value while on the other hand only if it falls under post-supply category those discounts will be included in the transaction value where such post-sale discount, as per agreement, is known at or before the time of supply. The current trends of offers given by the operators in the form of the cash backs and promo codes will fall under the latter category and will have to be readjusted to suit the changes under GST.
Removal of Cascading taxes
Under the current scenario the traders are denied the credit of the service tax paid on the input services as the warehousing, logistics etc. and the service provider cannot claim the credit of VAT paid on the goods that are used for facilitating the output services. This results in the blocking of the input tax cost for this sector as the VAT is applicable on the output side whereas most of the input cost are services. The modal law of GST will remove the restrictions on the cross utilization of the credit. Ecommerce sector will be benefited from this change under the GST as it will facilitate the seamless credit across supply chains, with tax set offs available across the production value-chain, both for goods and services. This will lower down the cascading effect, bringing down the overall cost of the supplies.
Consolidation of Taxes
Under the current scenario, the VAT rate for the same good differs from state to state such as the rate of VAT on mobile phones in Karnataka is 5% whereas in Maharashtra it is 13.5%. This has led to classification disputes in the past. However, the under the GST the rates at both the central and the state level will be uniform which would reduce the disputes.
The growth of any business is very good news for the country’s economy and the tax authority. Ecommerce is a booming industry in India which is expected to cross $100 billion mark by 2020. The unprecedented growth has raised many tax concerns and other challenges related to competition. While the government expects to increase the income by collecting tax through the growing business, it should not hamper the growth of the business by complex tax policies which harm the business environment. Unfortunately, the laws till now have proven more to be obstacle than the drivers of growth. With implementation of GST, which is due from the 1 July, 2017, it is expected that the simplified structure will help the government to reduce the tax evasion and at the same time promote the interest of the Ecommerce sector to grow at the maximum level by allowing the simpler tax structure and the increased ease of doing the business.
 Section 43B (d), Modal GST Law.
Section 43B (e),Modal GST Law.
Section 43B (a),Modal GST Law.