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GST: Impact on E-Commerce Business

Published: May 22, 2017

Goods and Services Tax (‘GST') is a revolutionary step in the reform of indirect taxation in India which is expected to be applicable from July 1, 2017. GST is a value-added tax levied at all points in the supply chain, with credit allowed for tax paid on inputs used in making the supply. It applies to almost all goods and services in a comprehensive manner, with minimum exemptions. With the implementation of GST, several Central and State taxes would merge into a single tax whichwould mitigate double taxation.

GST will affect the entire value chain of operations of all industries namely procurement, manufacturing, distribution, pricing, storage and sales.And so, the impact and opportunities offered by this reform must be understood to effectively manage the business in compliance with the law. In this article, we shall focus on the impact of GST on electronic commerce (e-commerce) business model.

E-commerce business, a relatively new way of marketing in India, offers the c onsumers an option of comparing the products and their prices and consumer ratings before buying online 24*7 at their comfort without going to any physical store. Innovative and convenient shopping options are attracting hugenumber of buyers daily. At the same time, E-Commerce provides many growth opportunities to the sellers to cater to a large consumer base. E-commerce is growing at an unprecedented rate year on year. A ccording to a research by Worldpay, the leader in global payments , India will be the world's second largest e-commerce market by 2034. While the number of e-commerce operators and sellers listed on their portal has increased manifold in recent years, such parties are now skeptic about the new compliance requirements to be done under GST. We would discuss the important changes applicable toan e-commerce business model under GST law to enable smooth and systematic transition for the concerned parties.

Who is covered under E-Commerce Operatordefinition

As per the Act, electronic commerce operator (e-commerce operator) means any person who owns, operates or manages digital or electronic facility or platform for the supply of goods or services or both, including digital products.

No minimum turnover and no centralized registration

There is a threshold limit of turnover beyond which a seller needs to get registration under GST law. However, these limits are not applicable for an e-commerce operator and thesupplier of goods or services, who uses online portal to execute the supply. They have to get registered under the GST law irrespective of their turnover. This shall deter small businesses to enter or continue their business on e-commerce platform. The Government should reconsider the exclusion for e-commerce market players and should keep them at par with other sellers.

Moreover, a sellerwill be required to get registered in all the States where they have a place of business against the centralized registration in the present tax scenario. Place of business includes offices, warehouseor any other place of storage of goods. This shall result in increasing the compliance formalities, especially for big e-commerce companies which maintain offices and warehouses in most of the states to reduce the delivery time of products.

Increased competition with standard tax rate

Presently, VAT rates for same goods are different in various States making the same good cheaper or costlier in different States depending upon the VAT rate. The e-commerce operator usually lists the sellers charging less tax making the product cheaper than local market of that place. Under GST, there will be standard tax rate for every product and so, the online sellers have to compete hard with physical stores selling same products. This measure would help in reduction of tax evasion also.

Tax Collection at source (TCS)

An e-commerce operator shall have to deduct a percentage of tax per transaction while making payments to the sellers of goods and services. Such TCS shall be deposited with Government as collection towards GST.

Here, it becomes important to understand the complexity for the e-commerce operator wherein such TCS has to be bifurcated into Central Goods and Service Tax (CGST), State Goods and Service Tax (SGST) and Integrated Goods and Service Tax (IGST) by the e-commerce operator depending upon the nature of supply. Where the supplier has charged IGST, the amount of tax collected shall be deposited by the e-commerce operator under IGST. And, where CGST and SGST has been charged by the supplier, the amount of tax collected has to be divided in the ratio of the rates of CGST and SGST and deposited accordingly with the Government.

Further, this shall affect the liquidity and cash flows of the sellers and they may require additional working capital to continue their operations. This shall significantly affect the smaller firms and may force them to quit e-commerce platform altogether.

Forms and Returns

In addition to normal returns for all sellers, an E-Commerce seller will be required to file monthly statement and annual statement relating to TCS and credit required, containing the details of supplies of goods and services made through its portal, the returns of such supplies, and the amount of tax collected during the period. These returns are required to be filed for every State in which the registration is obtained.

Further, most of the products sold online carry a return date of about 30 days. With millions of transactions in a month, returns and refunds affect the tax liability significantly and so, require special attention. The situation may become more complex when such huge refunds need to be adjusted every month with filing of monthly returns by both the parties. D etailed books of accounts and record keeping shall be required for all transactions along with supporting documents to comply with these requirements.

Moreover, the returns furnished by the e-commerce operator shall be matched with the corresponding details of outward supplies furnished by the actual supplier of goods and services.The discrepancy, if any, in this regard shall be communicated to both parties which must be rectified in the respective return for the month in which the discrepancy is noted. To fulfill these requirements, the e-commerce operator and the supplier of goods and services must stay in regular contact.

Composition Scheme benefit not available

The sellers registered with e-commerce operators are usually small or medium businesses. The Composition scheme under GST law has been introduced to reduce the compliancesand tax liability for small and medium businesses. The businesses registered under this scheme are required to file quarterly returns instead of monthly returns and pay taxes at nominal rates depending upon the type of goods and services. However, the benefit of composition scheme is not open for e-commerce businesses.

The sellers on e-commerce platform should also be included in the composition scheme, else they will face unjustified compliance burden and tax liability.

Conclusion

It is stated that the GST would usher an efficient tax system and ease of tax administration with greater transparency. To keep a check on tax evasion by e-commerce market players, various provisions like Tax Collection at Source and filing monthly and annual returns with respect to such tax collected have been introduced. Added is the requirement for registration in each of theindividual States in which they operate with no minimum turnover limit. This shall multiply the compliances but it remains a question whether it is going to support tax administration or affect the growth of e-commerce sector.GST is a welcome step to regulate indirect taxation in India but the businesses should be supported with clarity on laws and ease of doing business to enable them to effectively comply the legal provisions. The increase in compliance requirements would certainly affect the cost of doing business. The sector should be regulated in a phased manner with complete clarity on provisions to support its economic growth.

The e-commerce market players are advised to systematically plan and implement the changes required under GST law. A smooth transition shall help continue the growth trajectory of e-commerce operators and sellers using e-commerce platform.

(The author is a Company Secretary by profession)