India is on the verge of going live with the long over-due indirect tax reform, the introduction of Goods and Service Tax (GST). Despite certain delays, the Constitutional Amendment Act which empowers the Center and State to simultaneously tax the same transaction was enacted in September 2016. In the run-up to the target date of 1st April 2017, the government has created the GST Council which has already approved certain rules for GST registration, return, invoices, refund, etc.
The e-commerce sector, under the existing indirect tax regime, faces some of the following significant trends / challenges:
- Different VAT rates prescribed by various states on similar goods, leading to tax arbitrage in locating warehouses in states with lower rates of VAT;
- Requirement of statutory forms, way bills, road-permits etc. have made movement of goods across state borders extremely challenging;
- Certain states like Madhya Pradesh, Bihar etc. are even attempting to levy entry tax on e-commerce companies, for sale of goods to customer located in such states;
- Non-creditability of service tax to a seller selling goods on an ecommerce platform is one more such adverse effect. Service tax on commission charged by e-commerce companies to sellers, as well as on rental of warehouse, etc. are some of the examples.
- No specific provisions on the tax treatment or documentation to be maintained, for transactions involving e-wallet, cash-on-delivery, gift vouchers, drop-shipment etc. have also added a sense of uncertainty and confusion for e-commerce companies.
The proposed Model GST Law (MGL) has been formulated, to not only ensure, that some of these challenges are put to rest right away, but also enforce compliance by traders through use of these e-commerce platforms. On the flip side however, this is likely to result in greater compliance challenges for the e-commerce sector and also raise issues that would require further clarity and certainty.
Given the dynamic and complex nature of this sector, the MGL has a separate chapter dedicated to the e-commerce sector, which 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. However, e-commerce operator who supply goods on their own behalf are not covered under the definition of e-commerce operator.
Some of the specific requirements prescribed in the MGL, are briefly discussed below:
Tax Collected at Source (TCS):
Every e-commerce operator is to register for TCS and collect tax at source from payments to be made to the sellers with respect to the value of goods sold by the seller on its platform. It also appears likely, that taxes will have to be collected and paid by the e-commerce company in the respective state where the seller is registered; additionally, details of every sale transaction effected by each seller will have to be reported by the e-commerce company in the prescribed form every month, for each state. It is also surprising to see, that despite provisions for tax exemption to small market players and zero rating of exported goods, TCS will still be needed to be collected at source from such suppliers with no exemption to anyone. This may significantly increase the onus and compliance burden on e-commerce companies having a large seller base, as this would require them to register in each state where the sellers are located, as well as track and report all transactions on a monthly basis for every seller.
One of the biggest boons for the e-commerce sector may be the introduction of uniform tax rate on similar goods across India; additionally, the absence of tax arbitrage, entry tax challenges, cascading tax implications etc. may potentially give way to redesigning the supply-chain network, purely to gain business efficiencies.
The e-commerce sector witnesses nearly upwards of 20-25% of sales returns. However, the current MGL does not provide for any adjustment of the tax paid on original supply against which returns from customers are made. This issue if not addressed, can challenge the entire business model for e-commerce as a whole.
Matching of Credits / TCS on GSTN: The MGL puts the onus equally on the seller and the buyer of the goods / services to report and match every transaction on the GST Network to enable the buyer to claim of input tax credit or TCS. This puts an unfair and huge obligation on e-commerce companies and its seller network partners to create a parallel system, which reconciles all transactions, every month, to ensure real-time credits of taxes paid.
Way Bills: Way-bills have been a huge impediment to quick movement of goods across the country – thereby increasing the cost of goods. While it is still unclear whether the need for way-bills for movement of goods will be completely done away with, post implementation of GST, it appears likely that the GST Network may provide the seller with a facility to generate an Electronic Reference Number online, by providing invoice details which could thereafter be flashed at all state check-posts en-route, thus saving logistics time and costs.
Valuation: Treatment of cash backs, promotional codes etc. remain ambiguous and unaddressed with lack of clarity – this could have a significant impact on e-commerce sector as well.
While the implementation of GST may appear to be bitter-sweet, due to the significant increase in compliances, e-commerce companies and the sellers do stand to gain significantly from uniform tax rates, fungibility of credits and reduction in transit time at check post, etc. The government on its part will also look to use this platform to enforce GST compliance by the sellers.
(Views expressed are personal)