Will Tax Collection at Source (TCS) really spoil E-Commerce Party ?


By Sumit Dutt Majumder

IT is the expectation of the people of India that GST would be a win – win proposition for all sectors of the economy in spite of its not being a perfect one because of certain constraints of a joint venture between Center and thirty one States ruled by different political parties. In the midst of the high expectation, a discordant note is being heard from one particular sector- the e-commerce sector. This sector has raised many concerns, particularly on the issue of Tax Collection at Source (TCS) by the e-commerce operators from their vendors and depositing it with the tax authorities. Let us have a critical look at their concerns.

Basics of E-Commerce

First, a few words about the e-commerce. Generally speaking, e-commerce is the business of buying and selling goods and services on the Internet. It is also associated with conducting any transaction involving the transfer of ownership or rights to use goods or services through a computer mediated network. Driven by a young demographic profile and increasing Internet penetration, the growth in e-commerce has been phenomenal. According to a joint ASSOCHAM – Forrester Study Paper, India’s e-commerce revenue is expected to jump from USD 30 billion in 2016 to USD 120 billion in 2020, at the annual growth rate of 51%. Starting with traditional ‘stock and sell’ model, the e-commerce companies have transformed themselves into a multi-model platform. It can therefore be said today that the e-commerce means ‘use of electronic communication and digital information processing technology in business to create, transform, and redefine relationship for value creation between or among organisations, and between organisations and individuals’. Indian e-commerce industry is unique because of its sheer number of transactions, complexity and the employability of the unorganised sector.

The e-commerce keeps on evolving itself in various new formats for different types of transactions. There are many models for making supplies through e-commerce like Direct Sales Model, Inventory Model, Market Place Model, Managed Market Place Model, Fulfillment Model and Hybrid Model. The key trends driving e-commerce in India have been explained in a CII – Deloitte Report. The trends have been reported to be the Government initiatives in embracing and leveraging e-commerce digital platforms, phenomenal increase in internet penetration, wide-spread adoption of Smartphones,evolution of new digital payment solutions and increasing incidence of partnership of e – commerce operators with the Third Party Logistics Service Providers (3PLS) like India Post to reach the hinterlands of the country. Finally, there is the e-commerce sector’s expectation that GST would enhance their growth further. This report does help in understanding the growing importance of e-commerce.

Current Indirect Taxation System for E-commerce

The current indirect taxation system comprising Service Tax,State VAT and Central Sales Tax (CST) is not geared up to recognize and accommodate the evolving business models of e-commerce. The Central Government has been collecting Service Tax on the services provided by various e-commerce operators. But, there are no specific provisions for the e-commerce operators to pay taxes on sale of goods or to make any tax deductions from the payments being made by them to actual seller of the goods. But many states have started prescribing Returns to be to be filed by the e-commerce operators with information relating to the supplies made through their portal. Attempts by some states to equate e-commerce companies operating through the ‘Marketplace Model’ as dealers, and collect State VAT from them have not succeeded; this has reference to the Kerala High Court Judgment in the case of Flipkart Internet P Ltd. and others.

In the existing indirect taxation system, the e-commerce sector faces many difficulties, particularly on following issues of indirect taxation. On classification issues, the challenge is categorization of the offerings in e-commerce as ‘goods’ inviting payment of VAT/CST or as ‘services’ inviting payment of Service Tax. Both State VAT/CST authorities and Service Tax authorities want to exercise their right over digital transactions like downloads invoking software, music e-books, etc., leading to disputes and endless litigations. On the issue of compliance cost, the difficulties arise particularly in inter-state movement of the offerings by the e-commerce operators. These relate to the complying with the requirements of statutory forms, way-bills, road-permits, registration of e-commerce market place entity for entry/sale of their offerings into a State etc.

On supply chain management, there are many issues surrounding e-commerce. The shipments and returns across the country involve lot of paperwork and other compliance costs. Further, at present the sourcing, distribution and warehousing strategies are designed by the companies from the perspective of minimizing the tax liability. Besides, in view of non-uniform tax structure for VAT, Entry Tax etc. across the States, the pricing of the goods and calculation of margins become a challenge at present. Further, there is a lack of clarity on taxation and documentation management for typical e-commerce sector transactions such as e-wallet (advance deposits by the consumers), cash-on-delivery (payment collected at the doorstep of the consumer), gift vouchers, drop-shipment (direct delivery of goods from the e-commerce company vendor to the e-commerce company customer) etc.

The e-commerce sector believes that GST would take care of all these challenges and make the tax compliance easy.

Traditionally, indirect taxation revolves around physical presence and physical movement of goods across jurisdictions. But, e-commerce models are different where supply of goods is happening across internet networks. Since it is difficult to establish and track physical movement of goods and also track millions of transactions, the taxmen believe that the possibility of pilferage and revenue leakages is high in this sector. Problems in taxation are currently being faced mostly in models where the e-commerce operator does not directly buy or sell the goods from the sellers but claims to only facilitate the sale. In these cases, the sale is being claimed to have happened between the seller and purchaser with the e-commerce operator being only a service provider to the seller. The operator charges a commission from the seller for each sale. In these cases, the seller is declaring the sale of goods in its return while the e-commerce operator only declares the total amount of “services” provided to the seller and pays tax on it. From a taxation point of view, it is important that online transactions of goods and services are taxed fairly.It is also important that the small traders should not be adversely effected. In the GST era, the challenge is of tracking and taxing interstate sales. The matter of incidence of CST on interstate trade through e-commerce is already in litigation in a number of Indian States.

E-Commerce in GST Regime

While the first draft MGL of June, 2016 had retained the concept of Aggregators, it has been dispensed with by the Revised Model GST Law published in November, 2016. Certain definitions relating to e-commerce have been given in Section 2 of the Revised MGL. The term ‘electronic commerce’ has been defined as ‘supply of goods and/or services including digital products over digital or electronic network’. The term ‘electronic commerce operator’ has been defined as ‘any person who owns, operates or manages digital or electronic facility or platform for electronic commerce’. In the first draft MGL the definition of ‘e-commerce operator’ covered only the platform players. It had separately provided for an ‘aggregator’ in similar lines with the existing Service Tax provisions. Companies like Uber, Ola, Oyo Rooms etc. could fall under this category. As mentioned, the concept of aggregator has been dropped in the Revised MGL, and instead the definition of e-commerce operator has been expanded to cover all kinds of e-commerce operators that include : Providers of a platform where supply and invoicing are done by the actual supplier (e.g. Amazon), Suppliers of their own goods/services on line (e.g. Fab India) , and Entities who raise invoices for supply of others’ services (e.g. Google Play.)

There is only one section i.e. Section 56 in the revised MGL that deals with tax collection at source (TCS). It has twelve clauses. Every e-commerce operator providing a platform to facilitate the supply of goods and/or services is required to collect tax at source, while making payments to vendors, and file a statement giving details of the transactions. The vendors would then be eligible to utilize this tax amount to pay their output tax liability. Thus, the TCS amount will not ultimately go to the kitty of the government. But, it will remain blocked for some time. Therefore monitoring the businesses that supply goods and services via e-commerce operators appears to be the basic intention of the GST Council.But, this decision will have collateral damages for this sector.

Concerns of E-commerce Sector

The concerns of e-commerce sector regarding TCS are explained below in brief.

The most critical concern is that every vendor on the e-commerce platform will need to register, regardless of threshold, at every state where he makes a supply. The scheme of one central registration valid for the entire country is absent in the structure of GST. This will pose a great obstacle for small and occasional dealers who otherwise wish to increase their sales through e-commerce. The platform players would also be impacted since such dealers may decide to refrain from availing their services for effecting the supplies. Further, it is not clear whether for the purpose of depositing tax collected at source the e-commerce operators would also be required to obtain registration in every state where the suppliers using their platform are situated.

The issue of multiple registration depending upon the places (read states) of supply will be relevant for overseas suppliers as well. Currently, they discharge Service Tax through centralized registration either by themselves or through a representative.

Under the current Indirect Tax provisions, the vendors selling goods via e-commerce can not avail credit on Service Tax. The revised MGL has provided in Section 56 (5) that the supplier using the facility provided by the e-commerce operator will be entitled to claim credit. This will naturally entail following the procedure of getting registered at each state of supply and complying with the provisions relating to ‘place of supply’ in the cases of inter state supplies.

Although the tax collected by the e-commerce operator and paid by the vendors would be available as credit to be utilized later for payment of output tax, it is estimated by a major e-commerce operator that at the current scale of business, around Rs.400 Crores of capital a year will get locked in the system and that will not be accessible to sellers. This is likely to deter the sellers from coming online with the e-commerce operators. TCS would also enhance tax costs since many such suppliers who are below the threshold do not pay VAT, Entry Tax or Service Tax on date. The Small -Scale and Start-up suppliers would suffer since the threshold of Rs.20 Lakhs for GST would not apply to such transactions in terms of the provisions of Para 6 (xi) of Schedule V to the MGL. Further, TCS would be a compliance hazard, specially in cash- on- delivery scenarios. Importantly, IT and other systems will also need to be restructured to ensure compliance with strict disclosure requirements prescribed in the MGL. Finally, all the aforesaid responsibilities will put a huge accounting and manpower burden on the e-commerce operators, given the fact that there are now lakhs of sellers having millions of transactions on these e-platforms.

Concluding Remarks

Reportedly, all these concerns have recently brought the major e-commerce operators including Amazon, Flipkart, Snapdeal, Paytm, Grofers and Zomato etc together.They voiced their GST concerns jointly. Given that India’s e-commerce revenue has been growing at an annual rate of 51% it is hoped that the GST council would mitigate their concerns by dropping the idea of TCS for e-commerce operators since , in any case no revenue would accrue to any Government. Instead, the Council may find some other simpler way of monitoring businesses that supply goods and services via e-commerce operators. That will definitely help the e-commerce sector to not only sustain their remarkable growth but also enhance its growth further because of all the ‘goods’ virtues of GST.

(The author is former Chairman, Central Board of Excise Customs and currently Consulting Editor, TIOL)

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