GST and E-commerce

[SKP IDT]

Over the last couple of years, the advent and augmentation of e-commerce market in India has changed the way people buy and sell goods and services. India is adding three new Internet users every second and is the second largest market for e-commerce. Though the sector is still in the infancy stage, considering the endless possibilities in the Indian markets, huge hopes are pinned on the sector and e-commerce in India is expected to perform better year on year.

Taking into consideration the immense potential of the sector, one would expect tax laws to be conducive to the growth of this sector. Unfortunately for the e-commerce sector, the current indirect tax laws in India are an impediment to operations, thwarting the growth of the sector. Now that the Model GST law, 2016 is issued by the government on 14 June 2016, it would be relevant to understand what were the problems plaguing the e-commerce sector under the present Indirect tax laws and whether the same are addressed in the Model GST law or have worsened their position.

Current Indirect taxes on e-commerce sector- A nightmare for the industry

With the increase in competition in the e-commerce sector, companies are adopting innovative business models to attract customer attention including inventory model (e.g. Shopper Stop, Croma), social network model (e.g. TripAdvisor, Zomato), aggregator model (e.g. Ola cabs, Uber), marketplace model (e.g. Flipkart, Snapdeal), Transaction broker model (e.g. IRCTC) using modern technologies including cloud computing, mobile applications, digital networks, etc. However, the indirect tax laws have failed to recognize and accommodate the evolving business models, resulting in a complex framework of levy involving Value added tax (VAT)/ Central Sales tax (CST), excise duty, service tax and entry tax. We have highlighted the major problems faced by the e-commerce sector under the current Indirect tax regime as below:

• Levy of VAT/ CST e-commerce transactions:

Since the e-commerce operators are mere facilitators between the supplier of the goods or services and the customer, typically the operators are required to collect service tax on value of commission charged by them to the suppliers. However, considering the complexity of different models under the e-commerce sector, the tax authorities are perplexed whether the movement of goods from supplier to the warehouse of operator would fall within the ambit of sale of ‘goods’ chargeable to VAT / CST. Further, in most cases the suppliers are not registered under the State VAT laws and are not charging VAT/ CST on the transaction executed, the authorities want e-commerce companies to obtain registration and pay VAT/ CST on sales generated on their portals on the argument that the operators are acting as agents for the sellers.

In view of the above, the Kerala state department recently issued demand notice on various e-tailers demanding discharge of VAT liability on sale of goods hosted on their web portals. It should be noted that though the demand was slashed by the Kerala High Court subsequently, the same issue has replayed in the state of Karnataka, where the state VAT department is demanding VAT on sale of goods from the warehouse of e-tailers.

• Levy of entry tax on online purchases:

Recently state tax authorities of Uttarakhand, Kerala, Karnataka, Assam and Bihar imposed a 10 percent entry tax on sale of goods online. Similarly, the Gujarat tax authorities have recently amended their entry tax laws to levy 15 percent entry tax on online purchases. One may argue that levy of entry tax by state tax authorities is justified to bring the retail traders at par with e-commerce operators.  However, levy of entry tax has affected deliveries to these states resulting in higher costs for consumers on online purchases impacting the e-commerce business.

• Restrictions on claim of credit by suppliers:

Under the current Indirect tax regime, the suppliers cannot utilise credit of service tax paid by the operators for payment of their Excise/ Service tax/ VAT/ CST liability, since the services availed by suppliers cannot be attributed to their manufacturing/ trading activity. Further, even in case of service tax paid on common input services including accounting fees, rent, etc. the suppliers are required to reverse the credit in proportion to their trading operations (which is considered as an exempt service under the Service tax legislation). This results in huge increase in costs to the sector and has affected the margins of the suppliers.

To summarise the above, absence of specific direction and clarity under various Indirect tax legislations has led to diverse practice being adopted by the e-commerce sector and tax authorities on taxability of transactions, ultimately leading to tax litigations and increase in cost of compliances and operations.

GST on e-commerce- Boon or bane

Bringing the e-commerce under GST will help combine all indirect taxes as the same would be subsumed under GST. Under the Model GST law, the existing litigation over levy of VAT/ CST and Entry tax on e-commerce transactions would be resolved, as all the taxes would be subsumed under GST. Further, introduction of GST would result in enhanced compliance and transparency and would reduce breakage of the credit chain through availability of cross-sector credits. The same is expected to provide a major relief to the industry and reduce overall costs of the transactions.

However, though all seems merry for the e-commerce sector under GST, the release of the Model GST law has opened up major challenges for the industry. We have attempted to explain the challenges for the e-commerce sector under the Model GST law in the following paragraphs:

• Introduction of Tax Collection at source (TCS)

The standout problem for the sector in the Model GST law is the proposal to introduce a concept of ‘Tax collected at source’ (‘TCS’) on e-commerce transactions. As per the Model GST law, any payment made by the e-commerce operator to the supplier would be subject to TCS at a rate to be notified. The TCS collected would be available as credit to the supplier. Further, the e-commerce operator would be required to pay the TCS collected and file an electronic statement to disclose TCS collected and supply of goods/ services made through every supplier during the month within ten days from end of month. This move of introducing TCS on e-commerce operators would significantly augment the compliance burden, since many of them deal with thousands of suppliers operating on their online platform. Additional compliances would require tweaking IT and other systems and increased costs to ensure strict disclosure requirements prescribed under the Model GST law.

• Inter-state movement of goods on online purchases:

On a cursory reading of meaning of the term ‘supply’ under the model GST law, it appears that any movement of goods from one place to another would attract GST. Accordingly, there arises a question on whether movement of goods from the supplier to the warehouse of the e-commerce operator without actual transfer of ownership would be subject to levy of GST by considering the e-commerce operator as an agent of the supplier. Further, there is also ambiguity on whether GST would be applicable on stock transfer from one warehouse of the e-commerce operator to another.

• Treatment of free supplies under GST:

Basis the Model GST law, supply of goods or services by a taxable person to another taxable/ non-taxable person in the course of furtherance of business is deemed to be supply for charging GST, even though the transaction is without any consideration. Accordingly, it may be inferred that GST would be applicable on free supply of goods by e-commerce operators to customers under promotional offers on the website of the operators. Further, even barter transactions are covered under the term supply as per the Model GST law and therefore exchange offers by e-commerce operators may attract GST.

• Valuation of supplies under GST:

As per the Model GST law, post supply discounts would be included in the value of taxable supply (except where it is known beforehand). Accordingly, in case of sale of goods at a discount, the operator may be required to pay GST on the price without discount resulting in additional tax burden on the e-commerce operator.

In light of the above, though the GST is expected to bring in major benefits to the e-commerce sector, the industry may suffer in case clarity is not provided to the above concerns and ambiguities in the Model GST law.

Way forward- What should the e-commerce companies do?

Though there a few ambiguities in the Model GST law released by the government, implementation of GST would address majority of the concerns of the e-commerce sector in terms of single Indirect tax across India, seamless flow of credit, etc. and would act as a catalyst for the growth of the industry by improving the ‘ease of doing business’. It can be seen that implementation of GST would be a huge impetus to the sector which is currently going through a rough patch on account of dwindling investments and mounting losses.

Considering the intent of the Government to rollout the GST by 01 April 2017 and the efforts put-in to bring all states on board (except Tamil Nadu which has a few reservations), the e-commerce companies should prepare in advance by analysing the Model GST law and developing the required infrastructure to welcome the reform. Further, since the Model GST law has been released with the intention of inviting trade and industry comments, the companies should approach the government with suggestions and concerns to resolve grey areas including removal of requirement to deduct TCS, applicability of GST on movement of goods to warehouse without transfer of ownership, treatment of free supplies and discounts, valuation of supplies under GST, etc. The government has taken the first step now it is up to the industry to walk the last mile to enable positive implementation of GST.

The article is authored by Sunnny Kachalia – Manager, Saurabh Punamia – Senior Executive and Bhavika Jain – Executive at SKP Business Consulting LLP and the above views are personal.