GST and e-commerce: How tax collection burden can hit India

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.

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 fulfil 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 ‘A’ places an order with a seller ‘B’ on a marketplace. B 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 A and B. 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 sought 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 representation. Reviving these proposals in a somewhat modified manner is rather unexpected at a time when ‘ease of doing business’ is the mantra.

The proposal seems to stem from an apprehension in the tax administration, particularly the states, that there is rampant evasion of tax by sellers listing on e-commerce platforms. One cannot have a view on this in the absence of published data on tax evasion on marketplaces, but it also cannot be denied that marketplaces leave an indelible electronic footprint of transactions. Many state governments have used this to their advantage and prescribed information returns for marketplaces, which they have effectively used to book erring sellers. The proposed measure does not seem to be an improvement over the current information sharing arrangement and it is not clear what purpose would be served should this be carried through.

This proposal is limited only to marketplaces and does not cover inventory-owning e-commerce players, since they do not qualify as ‘e-commerce operators’. Even within marketplaces, it is applicable only to those that collect money from customers for onward remittance to sellers. Therefore, it has limited application—only for select players, some of who have invested billions of dollars in FDI and have made available to the Indian market, technology that provides best in class tracking mechanisms for sellers and customers. Logically, sellers on marketplaces should not be placed at a disadvantage over those selling in the inventory model, in the same e-commerce space.

The other important point is that marketplaces have given sellers an access to consumers like never before—in particular to small and medium sellers who are otherwise constrained by geographical limitation. Collecting tax from them by way of TCS (tax collection at source) would adversely impact their cash-flows and could put many of them in a situation where they would unnecessarily have to go through the hassles of claiming refunds from the government, since the tax is collectible from them without any limits on threshold, and without any consideration for the input tax credits that they may have in their accounts. For marketplaces, the compliance burden is quite onerous, since this would be a daily feature for thousands of sellers. The proposed IT infrastructure gives the tax authorities access to transaction/invoice level details and the information return filed by marketplaces is more than sufficient information at the disposal of the tax authority. The responsibility of enforcement and detection of tax evasion is a power vested with the authorities. While marketplaces would be expected to assist tax authorities in their efforts to curb tax evasion, the tax authorities should reconsider and maybe not shift the entire burden on them via this mode.

On the legal front, the proposed GST provisions leave many open issues. While the provisions use the term ‘collect’, it obligates the marketplace operator to ‘deduct’ the tax from the amounts payable by the marketplace to the seller. Secondly, when the transaction is one of sale of goods between the seller and buyer, with the marketplace acting as only an intermediary, how would the place of supply be determined? With reference to transaction of goods between the seller and buyer or with reference to the provision of service by the marketplace to the seller? Thirdly, the same GST model law contains separate provisions for ‘TDS’ for certain transactions. Then, why is the administration seeking to separate this industry from the rest and give it a different treatment?

The industry, still in its infancy in India, has already shown that it has the ability to be disruptive in an otherwise traditional retail market and this new buying habit of customers is here to stay. This is a new-age industry and deserves all the support it can get. The growth in the industry in the last 2-3 years is phenomenal and shows promise in generating employment/IP on a large scale for the future. The IT boom of the 1990s which catapulted India on to the global map is a contemporary example of minimum government intervention, maximum growth.

Lastly, the industry is also not just about a few large players but scores of other smaller players and start-ups who are new entrants. If the TCS provisions are introduced in this manner, many of these might have to leave the online platform, which could be a set-back for the Indian economy.

Therefore, the proposed TCS provisions need serious reconsideration.



One Reply to “GST and e-commerce: How tax collection burden can hit India”

  1. Miles Tuckey says:

    Software and other similar digital products imported over the internet are treated as services as the definition of “goods” in the GST Act explicitly excludes products that are “transmitted by a non resident to a resident by means of wire, cable, radio, optical or other electromagnetic system or by means of a similar technical system” The reverse charge mechanism may require the recipient to register for GST if the total value of supplies made in that month and the 11 preceding or following months exceeds $60,000.

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