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Tax Collection At Source Under GST May Put 1.8 Lakh Jobs At Risk: Amazon India

It would lock up to Rs 400 crore of working capital a year, he added.

A deliveryman  for Flipkart Online Services Pvt’s Ekart Logistics service, top, hands over India rupee banknotes at a cash counter inside the company’s office in the Jayaprakash Narayan Nagar area of Bengaluru, India (Photographer: Dhiraj Singh/Bloomberg)  
A deliveryman for Flipkart Online Services Pvt’s Ekart Logistics service, top, hands over India rupee banknotes at a cash counter inside the company’s office in the Jayaprakash Narayan Nagar area of Bengaluru, India (Photographer: Dhiraj Singh/Bloomberg)  

The provision in the draft model Goods and Services Tax (GST) law which mandates that e-commerce marketplaces must collect tax at source from sellers can put up to 1.8 lakh jobs in the industry at risk, according to Amit Agarwal, the Vice-President and Country Manager of Amazon India.

Small and medium retailers using the marketplace will be the worst affected, said Agarwal, adding that the lower payout will affect their working capital.

The provision would require us to collect up to 2 percent tax (from the seller), which would lock up to Rs 400 crore a year in its (sellers) working capital. Our estimate is that it could impact up to 1.8 lakh jobs in its current scale and as e-commerce was slated to grow significantly bigger in the next 5 years, these numbers will only go higher.
Anit Agarwal, Vice President, Amazon India

The revised draft model GST law, section 56 of Chapter XIV, says that every e-commerce operator providing a platform to facilitate the supply of goods and/or services is required to collect tax at source; one percent each as Central GST and State GST. This makes it mandatory for e-commerce marketplaces to deduct a portion of the amount payable to the supplier of goods and services and remit it to the government.

Agarwal was speaking at an event organised by the Federation of Indian Chambers of Commerce and Industry to discuss the implications of the model GST Law on the e-commerce sector. The event was attended by representatives from the three biggest e-commerce players in India – Amazon, Flipkart, and Snapdeal.

FICCI, in a media note, said that as the amount collected from buyers is kept in nodal accounts mandated by the Reserve Bank of India and not with the e-commerce operaors, capital will be lying locked and idle for 20 to 50 days in the nodal accounts without being accessible to anyone.

This would affect small and medium sellers as it would eat up a significant portion of their margins, said Agarwal.

They will be able to invest less. They won’t be able to invest ahead of growth because capital is sucked out of the system for them.
Anit Agarwal, Vice President, Amazon India

He also said that the provision ultimately hits the primary customer of the e-commerce market model, which is the seller. This might have a "negative flywheel impact" on the whole e-commerce industry, Agarwal cautioned.

From L to R: Anil Agarwal, Vice President, Amazon India; Kunal Bahl, CEO, Snapdeal; Dr. A Didar Singh, General Secy, FICCI; and Sachin Bansal, Co-founder, Flipkart. (Source: FICCI Twitter)
From L to R: Anil Agarwal, Vice President, Amazon India; Kunal Bahl, CEO, Snapdeal; Dr. A Didar Singh, General Secy, FICCI; and Sachin Bansal, Co-founder, Flipkart. (Source: FICCI Twitter)

FICCI’s note also referred to the “elaborate and cumbersome reporting requirement” under GST. It argued that 90 percent of the suppliers on e-commerce marketplaces are small and medium enterprises hence it would be challenging for them to comply with these reporting requirements. It added that these requirements go against the Government’s objective of providing ease of doing business. This may also result in smaller sellers avoiding the e-commerce marketplace.

Tax collection at source by itself is expected to have a significant impact on the cash flow, thus forcing the smaller firms to seek additional working capital or ignore the e-commerce marketplace altogether as it may not offer additional benefits. 
FICCI Media Statement.

FICCI also termed the ‘tax collection at source’ provision as discriminatory, saying that it applies only to the online retail segment and not the offline one. Moreover, it applies only to marketplaces and not those e-commerce businesses which operate on an inventory model, the note added.

As per the FDI (Foreign Direct Investment) policy, on-line marketplaces are not allowed to operate under the inventory model therefore it puts them at a disadvantage against those who are able to operate in an inventory model, on account of not having FDI. 
FICCI Media Statement

Sachin Bansal, co-founder of Flipkart Ltd., echoed his competitor’s view adding that the provision will serve as a deterrent for new sellers entering the e-commerce market.

The second problem that will happen is that the new sellers will be deterred from coming online because they’ll question ‘why should I deal with this stuff?’. He’d rather stay offline in the informal and cash economy, where they don’t pay tax. So there is a significant opportunity loss for the country and of course for the e-commerce industry.
Sachin Bansal, Co-founder, Flipkart

Save this one important grouse, e-commerce players remain highly optimistic about India's prospects under the new, upcoming tax regime. Agarwal called it "path breaking" while Bansal termed it a "forward looking law".

It will make India far ahead in terms of tax reforms as compared to where it has been and it will reduce friction for business overall.
Sachin Bansal, Co-founder, Flipkart

India’s e-commerce industry is expected to register a compounded annual growth rate of 45 percent over the next four years and reach a market size of $28 billion by financial year 2020, according to a Kotak Institutional Securites report.

FICCI added that industry’s growth prospects are high, such compliance would result in a slowdown.

At the moment, the e-commerce sector in India is at less than 2 percent of the entire retail segment and moreover, at a very nascent stage, with a promise of high growth in the future. Subjecting the sector to a major compliance at such an early stage will only result in slowing it down.  
FICCI Media Statement