E-commerce, in the present day, is one of the fastest growing sectors in India. In spite of myriad challenges faced from the tax perspective – including both origin state and destination state warring to tax the same online transaction and imposition of special entry tax – the e-commerce sector India has been steadily prospering and has been significantly contributing to the GDP of the nation. E-commerce has been fervently waiting for introduction of Goods and Service Tax (‘GST’) as it is the harbinger of positive tax reform and is poised to boost the growth of the sector as it is expected to iron out a gamut of tax concerns that the sector is currently facing.
With the Constitution (One hundred and Twenty second) Amendment Bill, 2014 (the ‘GST Bill’) having been passed in the Upper house of Parliament and coupled with draft of Model GST Law being released in June 2016, the government seems to have committed to introduction of GST sooner than later.
GST, which is a destination-based taxation, comes as a massive relief to the e-commerce sector as it is expected to end the battle between the states to tax an e-commerce transaction with situs of such transactions been a subject matter of intense debate with both the origin State as well destination State seeking to impose VAT/ sales tax on the very same transaction. States’ tussle has resulted in e-tailers being embroiled in unnecessary litigation around multiple states, thereby adding to the cost of doing business itself.
The second important issue that has been plaguing the E-tailers in particular has been imposition of special entry tax on products ordered by the customers notwithstanding the fact that such order of goods is for the personal consumption of individual customers. With levy of entry tax being subsumed under the GST regime and supply being the taxable event, the issue of entry tax should be laid to rest.
Given that GST envisages a regime of seamless flow of credit, the tax costs in the system are also expected to go down as the pool of credit would stand augmented. To illustrate, the e-tailers who sell on e-commerce platforms are currently unable to avail credit of the service tax charged on several input services (including the key input services of facilitation services and fulfilment services rendered by e-commerce platform). Such e-tailers should be eligible to avail such credit under the GST regime going forward.
As per the Revenue Neutral Report (RNR) issued by the Chief Economic Advisor, the standard rate of GST is pegged to be at 18 per cent. If the same rate were to be adopted, then prices of goods should stand reduced, consequently enhancing consumption and heralding buoyancy in the economy itself. Further, with the government having conceded to the demand of removal of additional tax of 1 per cent, which was proposed to be imposed on inter-state supply of goods, the e-tailer stands to gain on this account as well. On an overall basis, logistics and warehousing decisions of sellers and fulfilment centre service offerings of e-commerce companies can now be taken based on business factors and not considering taxes.
With GST integrating India into single harmonised market, it is expected the documentation hassle faced in respect of the movement of goods is effectively addressed and also with concept of Form C and Form F being redundant under the GST regime, the government intends to facilitate ease of doing business.
While there are significant positives the e-commerce sector, the single largest dampener has been the proposal to introduce tax collection at source (‘TCS’) on the e-commerce operators, wherein every e-commerce operator collects tax at source out of the amount payable to the supplier of goods and services and such collection is reported to the government.
With the detailed reporting sought from the e-commerce operators with respect to the supplies effected by e-tailers on the online portals, the intention of introducing TCS is futile in terms of information collection and ensuring compliance by sellers – as that would anyway be met under the reporting requirements of e-commerce companies.
It is discriminatory vis-Ã -vis offline sellers and would drive sellers away from making sales on an online platform. Additionally, it casts onerous responsibility on the e-commerce operators with additional responsibilities, compliances and assessments. Mechanism of TCS is also likely to hamper the small- and medium-scale sellers, as it would adversely impact their working capital.
Another issue of concern for the e-commerce sector is the concept of ‘aggregator’ (who is deemed to be a service provider), which was introduced in service tax, is proposed to continue under the GST, provisions for abatement (for fuel charges, etc. that are outside the purview of GST) is not forthcoming. Also, it is hoped that full credit of input services and inputs is received for services on which tax is discharged as an ‘aggregator’, to ensure no leakage of tax credits.
While GST undeniably comes as a relief to the e-commerce sector, it is also expected to pose challenges in respect of TCS, which the industry is hopeful would not be finally introduced.
The writer is Partner, BMR & Associates LLP; with inputs from Mamatha Anand, Associate Director; views expressed are personal