Fuelled by the unsurpassed growth of smartphones and the Internet, the eCommerce sector is changing the very basics of business. Companies like Amazon and Flipkart have brought about a sustained change, converting Indians from brick-and-mortar shoppers to online shoppers. Amidst this frenetic growth, Online sellers operating on these platforms are challenged by financial and tax laws. Such eCommerce sellers are also subject to ambiguities owing to their unique business model, whether it is direct tax or indirect tax norms. Since they deal with digital supplies involving multiple parties and multiple transactions across multiple locations, conflicting claims have been seen to arise. This may soon change with the implementation of the Goods and Services Tax (GST) system in India.
Changes incurred by the GST
The GST essentially introduces a new four-tier indirect taxation structure. Goods and services will be taxed under the slabs of 5%, 12%, 18% or 28%, depending on various factors. The following four bills have been ratified under this new tax regime:
- Central GST Bill (CGST): Collected by the Central government within the boundaries of a state
- Integrated GST Bill (IGST): Applies between different states, by the Central Government
- Union Territory GST Bill (UGST): Applicable to Union Territories
- The Compensation Bill: To compensate for revenue losses brought on by the GST implementation, over a period of five years
Core concerns around eCommerce taxation
The GST is an indirect taxation model based on the concept of ‘one tax, one market’. The online marketplace is likely to be significantly impacted in the GST law’s treatment of digital business. Being a relatively new area, traditional tax regimes have not been able to address the specific tax needs of online sellers.
One such area of concern is that the activity carried out by an online marketplace is often misconstrued by local tax laws as an activity done by the “seller”, rather than associating this activity with the actual physical seller or supplier. This creates a conundrum – must the online sellers, who are only responsible for packing, repacking and forwarding the consignment to the buyer, pay the tax? Or is tax and compliance the consideration of the suppliers who sell their goods merely through the intermediary platform?
Another important point is the treatment of the VAT legislation, considering that the movement of goods by an eCommerce seller happens through many states and jurisdictions. The same applies to payments of state entry taxes: simplifying the waybill compliance regimes is the need of the hour for such online sellers to get their due.
Yet another key issue is that of cash promotions. eCommerce sellers are known to offer buyers heavy discounts, picking up the balance cost themselves. Such discount funding is used as a tactic to promote growth, at the cost of bearing initial losses. However, under the current tax structure, VAT authorities are demanding tax on discount funding, making further dents in the eCommerce seller’s earnings. This is a situation peculiar to the eCommerce industry and must be treated differently. Online sellers who market digital content end up paying both VAT/CST as well as Service Tax, leading to double taxation.
These are some of the ongoing concerns as far the pre-GST indirect tax laws are concerned, and which the GST is expected to address.
Expected changes with the GST
The GST implementation will affect the various parties associated with eCommerce, primarily the seller and the online marketplace.
- Sellers: The seller pays and passes on to the customer the value of the VAT/ CST. Such a seller also has to incur the cost of the service tax charged by the online marketplace, thereby adding to the cost to the seller. Under the GST, the seller will charge a combination of CGST, SGST or IGST + additional tax, leading to a possibly higher tax at the output end. The seller stands to gain now, since all input taxes will be available as credit, and this includes the GST charged by the eCommerce sellers. This will help drive cost efficiencies for the seller.
- Online sellers: Currently, the eCommerce sellers charge service tax from the seller. Going ahead, the eCommerce sellers can avail themselves of service tax credit on input services. This does not, however, apply to VAT credit on purchase of goods. The eCommerce sellers will now be able to avail full credit on all input services. Also, the combination of CGST + SGST or IGST means that the tax rate may end up being higher. On the positive side, this can be balanced by the higher credit pool available to the eCommerce players, enabling them to slash their prices. On the infrastructure side, an eCommerce company with cross-locational presence will need to undergo multiple registrations depending on the states of operation and movement. For B2C transactions, B2B transactions, the location of the recipient will be treated as the place of supply. Such disparities in places of supply will lead to eCommerce sellers operating in multiple registered locations, calling for compliance complexities.
These are some of the evident impacts of GST implementation on the eCommerce industry. It is also important for the new regime to understand and appreciate the unique business model of eCommerce sellers. This begins with agreeing upon the very definition of eCommerce, rather than oscillating between vague terms such as ‘aggregator’ and ‘intermediary’. One must also consider the impact of this tax regime, not only on the involved companies, but also on the end consumer, i.e., the common man. If services end up being taxed in the highest bracket, due to ambiguities in the current/ erstwhile CGST/ IGST/ UGST and local and state laws (which differ widely), the end consumer would end up bearing the brunt. This would lead to compromising the quality of life of a population that is fast getting accustomed to digital spending and digital engagement.
It is therefore imperative that the GST implementation for eCommerce be unique and customised, and also balances the needs of the suppliers, sellers and end buyers in parallel.