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Exempt small online businesses from GST registration: Industry bodies

How mandatory GST registration specifically hurts the online travel sector was also brought up.

Small businesses in India want to sell online but are discouraged by the compliance burdens posed by mandatory GST registration, industry bodies Alliance of Digital India Foundation (ADIF), IndiaTech.org, and Nasscom said in separate letters sent to the government in March and April this year. The associations have asked the government to exempt small online sellers from GST registration similar to how small offline retailers are exempt.

“Many small businesses moved online over time and found that selling online granted them access to consumers in different geographies, helped them scale and manage their cash flows and gave some degree of resilience to pandemic-related risks that involved lockdowns, market closures and reduced footfalls. But many of these businesses today face a regulatory challenge on going digital.” – IndiaTech

What does the CGST Act say?

  • Threshold-based registration: According to Section 22 of the Central Goods and Services Act, 2017 (CGST Act) Act, every supplier is liable to be registered under the Act if their overall annual turnover is above the threshold of 40 lakhs in case of supply of goods and 20 lakhs in case of supply of services.
  • Mandatory registration for e-commerce retailers: However, according to Section 24 of the Act, persons who supply goods and services through e-commerce operators are liable to compulsorily register under the CGST Act, irrespective of whether their turnover exceeds the above-mentioned threshold or not.

Why is the requirement for online retailers burdensome?

  1. Increased cost for small businesses and dampening of digital growth: “These provisions have increased the overall cost and complexity of operations for supplying goods and services online. These also run counter to the spirit of Digital India that aims to promote digital and start-up growth, as they create an entry barrier for start-ups seeking to sell online by increasing compliance costs,” ADIF said. “Meesho, a social commerce platform, with a supplier base of 1 lakh suppliers testifies that it has to reject more than 70% of small suppliers due to the issue of GST registration. Else their supplier base would have been 3 times more,” ADIF told MediaNama. “The threshold limits were originally thought through by the GST Council and brought in because small businesses could neither afford nor comply with such requirements,” IndiaTech said in its letter.
  2. Will render many businesses ineligible: “The current GST norms not only create barriers for lakhs of traders from using e-commerce platforms to sell their products but even practically render ineligible, large numbers of small businesses of artisans, craftsmen, household and cottage industry, who are conducting businesses from their home to supplement the income of the family,” ADIF stated.
  3. Cumbersome and time-consuming: “The hesitation of small businesses to register under the GST law is not to evade taxes but to avoid cumbersome and time-consuming registration and returns filing processes. This discourages MSMEs from exploring online marketplaces,” Nasscom said.
  4. Adverse impact on the online travel sector: IndiaTech has also highlighted how the GST registration requirement specifically hurts the online travel sector. Non-AC buses are normally exempt from GST, but if the same service is supplied through online means they are liable to pay GST. “The above move will not only increase the overall cost of such services booked through online means as compared to the same booked offline by standing in the bus top or queuing in places where tickets are sold but also be counter to startups emerging in this space and unnecessarily force travellers to book tickets offline which may never have been the intent of the government that aims to promote Digital and startup growth,” IndiaTech said. “Since the aforesaid services usually cater to highly price-sensitive customers who come from poorer strata of societies and rural areas, this undue distinction would deter the customers from making the bookings online as well as suppliers from listing on online channels that give ease of access to such bookings,” IndiaTech added.

“Over the past few years, India has seen a surge in small enterprises and homemakers scaling their businesses. While it is true that in the future these small retail players will continue to be the backbone of the Indian retail industry, the new way forward for them would be to transform from offline mode to an “Offline + Online” mode of business.” – Nasscom

Why are different rules applicable for offline and online retailers?

“While the exemption for sellers having a turnover less than 40 lakhs has been instituted to reduce the burden of compliance (like monthly filings etc.), the reason to exclude e-commerce operators from the same is unclear currently,” ADIF said.

IndiaTech explained that the likely reason for differentiating between online retailers and offline retailers is because the threshold limit does not apply for inter-state sales and is applicable only for trade within the state. Since in an online sale, there is a likelihood that the customer may belong to another state, there is bound to be an interstate sale, and hence a mandatory registration requirement. “If the above has been the motivation behind such a clause then ideally the MSME ministry in the interest of MSMEs and small businesses should recommend that the exemption limit for small businesses should apply irrespective of whether the sale happens in the state or outside,” IndiaTech stated.

However, Economic Times reported that the reason for mandatory registration is “because of fear of non-compliance and tax evasion by the small-scale sector for online sales.”

What are the industry bodies requesting?

  1. Bring parity between offline and online sellers: All the three associations, IndiaTech, ADIF, and Nasscom have requested the government to take steps to exempt small businesses that use e-commerce platforms to sell their products or services from compulsory GST registration. “It is important to level the playing field between online and offline businesses to allow emerging startups to survive especially in the post-pandemic economy,” ADIF said.
  2. Restore GST exemption for transportation sector: IndiaTech has requested that the government also restore GST exemption on passenger transportation services by non-air-conditioned stage carriage and contract carriage when supplied through online means.
  3. Allow small sellers to benefit from the composition scheme: “E-commerce operators liable under Section 52 of the CGST Act cannot opt into the composition scheme. This has monetary and compliance implications as the composition scheme exempts small traders from filing multiple returns and fixes GST to be paid at a fixed percentage of annual turnover,” ADIF explained to MediaNama. In its letter, Nasscom has requested the government to allow small sellers to avail the benefit of the composition scheme.
  4. Allow sellers to register warehouses across states with a single address: “Further, in this digital era of virtuality, sellers should be allowed to register warehouses of e-commerce operators across states, based on a single physical place of business registration in the home state of the seller,” Nasscom said.

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