by Annkur P Agarwal
India is all geared up to go the GST route in FY 17-18. The implementation date has been set on 1st July 2017 and businesses all over are figuring how to be compliant in the GST era. While GST brings ease in the indirect tax structure in India, there are several aspects of GST that would challenge how businesses operate. I am keen to see GST impact on India’s booming e-commerce market. The Government has surely taken note of online as a major channel of trade and has introduced specific laws around marketplaces (e-commerce operators1) in GST implementation.
There are various aspects of GST impact on marketplaces/merchants selling online. A lot of these aren’t set in stone, however, there are certain areas that would definitely get impacted with GST. Here are some of my early thoughts captured.
Price advantage due to tax arbitrage would disappear:
A lot of e-commerce sales today gets pricing benefit from merchants based in states with lower VAT rates. For example, Karnataka has a tax rate of 5% on mobile phones, whereas Maharashtra has 13.5%. This helps online marketplaces compete better with local retail across India. A large electronics retailer recently commented to me that exclusive tie-ups between various brands and e-commerce sites could take a hit post-GST as the tax advantage of online marketplaces would be impacted.
Tax collection at source woes:
One direct provision in GST that impacts online retailers is Tax Collection at Source by marketplaces. All online sales happening in the GST regime would need to get a deduction at the aggregate level before passing on the proceeds to merchants, thus affecting cash flows. This provision is specific to electronic commerce and doesn’t apply to physical retail. Even at a nominal (proposed) rate of 2%, this would put online sellers at a disadvantage, especially in thin margin2 categories like electronics.
Another impact of this is, merchants evading tax payment on their online sales would be detected much more easily. In fact, under the new guidelines merchants regardless of their size would need to register under GST for selling online. This would be a major upset for small traders whose turnover is below the Rs 20 lakh threshold for GST registration.
Easier to weed out non-compliant merchants:
GST filings will mandate all merchants to report sales through online channel separately. This would mean that merchants selling online will need to declare (by means of monthly filing) sales done via different online channels along with the GSTIN of the aggregator. The aggregators on their part are also required to disclose sales & returns data along with merchant details in their filing. This would make it difficult for sellers to misrepresent their book of accounts as the same will now be tallied with the e-commerce operators filing. In the case of a discrepancy that is unresolved, the law suggests that the filing made by e-commerce operator would be considered true and tax liability for the difference would have to be paid by the merchant.
GST also proposes to give a public compliance rating to each registered merchant. This rating would help marketplaces identify merchants who are diligent in making their tax filings. Thus, improving the quality of sellers on their platform.
Platform changes for e-commerce players
Under GST monthly filings made by e-commerce operators and merchants would mention details of HSN / SAC of goods & services sold by them in each state. This would mean that e-commerce platforms would need to make several GST related tweaks into their system. This includes areas like product catalogue & payment collection, generating invoices on behalf of merchants and readying data for filing monthly GST returns. We can only guess how much effort it would be for different players, but it would surely need some work even for players like Amazon who may have dealt with this globally. GST in India is unique and there is dual play with states & centre both charging GST.
The curious case of B2B transactions via marketplaces
A lot of traders buy products online with cashbacks, discounts and festive offers only to resell them later. This hurts e-commerce operators who are primarily giving discounts to acquire new users. With GST this practice would become difficult. For claiming Input Tax Credit for GST on any goods/services, the supplier in the transaction has to make a monthly online filing with the GSTIN (GST Identification Number) of the purchaser. Only then Input Tax Credit would be allowed on that transaction. In the current VAT regime while mismatches can be tracked, it is only looked at during assessment.
If someone is buying online for reselling purpose (even if it is not just cashing in on a discount/offer) the e-commerce platform needs to provide a way in which buyers can mention their GSTIN number for sellers to take the same on record while making their filings.
For e-commerce platforms, this could be a blessing in disguise given that they may have just found a way to curb malpractices, but it could also mean more work given that the platform needs to support this feature for legitimate B2B sales which may happen.
Shipping across India would get easier & e-commerce Tax should become a thing of past
Several states have paperwork requirements for commercial goods being delivered within its boundaries. Zepo has a good list of this documentation and while media has been talking about it recently, these issues have existed since the good old Baazee.com days in the early 2000s. With the onset of GST, logistics for commercial purpose should become easier. E-commerce Tax imposed by states should also fade away given that GST is a destination based tax. This means that the state in which the delivery is being made would get the benefit. Hence giving incentive to states for allowing smoother deliveries within its boundaries.
No taxation dispute of orders fulfilled by e-commerce players
Under GST law it is acknowledged that merchants can make supplies from warehouses owned by e-commerce operators. The provision states that government officials of rank Joint Commissioner or above can demand information about the stock of goods held by e-commerce operators on behalf of merchants. Ideally, we should see tax issues arising out of e-commerce companies fulfilling orders to disappear.
#1: The definition of e-commerce operator/aggregator is a bit sketchy at the moment. I am unsure how C2C transactions and Uber / Ola would be considered.
#2: For the ones still thinking that online businesses have great economies of scale and are always cheaper than local, think again. There is a payment gateway or COD cost, packaging & shipping, marketplace commission and much higher return rates than local to deal with. Fundamentally it is tough for online players to compete on prices.
Annkur P Agarwal is Co-founder of SahiGST – a cloud-based solution for GST compliance in India.
