Tax complexities for e-Commerce: Will GST bring relief?


While taking a note of the possible benefits that may unfold under GST, it is too ambitious to expect that GST would turn out to be a one-step solution for all issues currently being faced by the sector.

Rajeev Dimri

Over the last few years, e-commerce has seen stupendous growth not only in India but across the globe. E-commerce industry is expected to receive further boost by Prime Minister’s recent commitment to Digital India campaign and Start-up India campaign. While on one side the government is trying to encourage start-ups using electronic platform, various taxation and regulatory issues have emerged as a big hurdle in the unfettered growth of this sector.

The problem is arising due to the absence of any special provisions to regulate taxation in this sector. As a result, e-commerce companies are grappling with complex taxation framework, which were conceptualized and designed prior to e-revolution. This has placed these e-commerce companies at a precarious position and at the mercy of taxation authorities in different states as far as interpretation as well as implementation of tax provisions are concerned. The e-commerce sector, owing to its unconventional and dynamic online market place platform for offering goods and service, most certainly requires special provisions for the purpose of assessment and collection of taxes.

Some Indian states have recognized this need and started working in the direction of framing special provisions for the sector. However, instead of putting in place a simple framework to ensure ease of business, these states have imposed cumbersome procedures to be followed by the sector. The biggest example in this regard has been set by Karnataka government whose tax and regulatory measures have shooed away one of the biggest e-commerce companies to Telangana. More recently, as per some news reports major online marketplace companies has stopped delivering their products in Uttar Pradesh and Uttarakhand owing to the tedious compliance requirements and frequent seizures of goods. These incidents clearly indicate that the Indian state governments are functioning in the reverse direction as far as augmenting the growth of e-commerce sector is concerned.

While the indirect tax system in India is not an easy game for any taxpayer, the complexity increases manifold with respect to e-commerce. The subsequent paragraphs touch upon a few key areas where issues are stirring up in the e-commerce space.

One of the major concerns for e-commerce is the proposed implementation of Value Added Tax (‘VAT’) on online marketplace companies in some states. The tax authorities keep seeking to tap the online marketplace companies to discharge VAT on goods sold through their websites. Though technically, the liability to pay VAT lies upon the vendors selling through these websites, online marketplace companies are made accountable for infractions (if any) by these vendors. The concerns aggravate in case of transactions triggering events related to sales in multiple states. Where a sales take place from a vendor located in one state to a customer located in another, both states try to fetch revenue out of the transaction.

Furthermore, despite efficient logistics being the backbone for the online marketplace companies, structuring logistics prove to be a herculean task due to multiplicity of compliances. These companies are required to undertake massive volume of paper work in the form of waybills, road-permits, transit pass etc leading to impediments in speedy delivery of goods especially in case of interstate transactions. To soar the situation further, recently, certain states have imposed local registration requirement on online marketplace companies for entry or sale of goods in the state. Further, currently VAT being a state wise tax, there is no cross credit mechanism in place for adjustment of input VAT paid in one state against output VAT in another. For digital products, online marketplace companies are also experiencing a tough time categorizing the offerings as ‘goods’ or ‘services’ for charging VAT or service tax. These companies spend considerable time, effort and money on tax compliances and disputes losing focus on their core business.

The ‘one-market’ tax structure to be implemented under the proposed Goods & Services Tax (‘GST’) regime may resolve some of the aforementioned issues. Simplification of tax structure and free flow of credits as envisaged under GST would result in cost efficiencies for online marketplace companies as well. Further, since GST envisions a unified market, it may mark an end to diversified state specific waybills and transit forms for interstate movement of goods. Also, with hopefully consistent state GST slabs across various states, warehousing strategies should no longer have to be based on tax related parameters.

While taking a note of the possible benefits that may unfold under GST, it is too ambitious to expect that GST would turn out to be a one-step solution for all issues currently being faced by the sector. For instance, even under GST, the tax authorities might hold the online marketplace companies accountable for any revenue leakage on sales made through their portal. In case the law makers choose to take an aggressive approach and levy dual taxes on online marketplace companies – for sales made through the portal as well as for commission charged from dealers, online marketplace companies would once again be caught in the same quagmire of multiplicity of taxes, multiple registrations and compliances.

Moreover, unlike the present taxation regime which requires businesses to pay taxes in the state from where sales take place, GST is proposed to be a destination based tax. In other words, GST would have to be paid in accordance with the legislations applicable in the state where the consumer is located. Consequently, online marketplace companies may have to undertake complete overhauling of their existing supply chain leading to additional costs for them. Also, the expected median rate under GST is higher than what presently applies on online marketplace companies (service tax of 14 percent). This may have a bearing on the working capital requirements of their businesses.

While it is important to ensure appropriate collection of revenue for the government, it is also important that GST laws are framed in a manner that they don’t prove to be detrimental for the booming e-commerce sector. Therefore, the law makers should try to safeguard the revenue interests of government while ensuring a conducive business environment for online marketplace companies in India. However, at this nascent stage, unfortunately even the tax laws on e-commerce in the international arena are not mature enough to set standards in the Indian context.

Author is leader, Indirect Tax, BMR & Associates LLP
With inputs from Poonam Harjani and Shankey Agrawal
Views are personal


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