Big GST Problem For Small E-Commerce Vendors
Taxation of e-commerce has been a challenge for governments across the world. Points of debate have come up in direct as well as indirect taxation. Provisions proposed under the new GST regime are by far the most far-reaching for this industry. The new rules will impact not only e-commerce operators, but also every e-commerce vendor who must now compulsorily register. In this article, we will analyze what was proposed under the first draft of the Model GST Law and the changes made by the second version.
‘E-Commerce’ Definition Widened
In the first draft, the definition of ‘e-commerce operator’ only covered platform players. It separately provided for an ‘aggregator’, such as to cover, in a loose parlance, Ola/Uber transactions. In the revised draft, the definition has been expanded to cover all kinds of e-commerce operators. The definition will now include all operators such as:
- Providers of a platform where supply and invoicing are done by the actual supplier. (Amazon)
- Suppliers of their own goods/services online. (Fabindia)
- Those who raise invoices for supply of others’ services. (Google Play)
Following this change, redundant definitions of aggregator, brand name and branded services have been removed. Specific provisions have been introduced to complement the broader definitions adopted. For instance, with the aggregator concept removed, central or state governments have been given the power to notify services where the e-commerce operator shall be considered as a supplier of service. Such notifications would require the concurrence of the GST Council.
While the definition of what constitutes an e-commerce operator has been widened, there are limitations on the kind of entities that will be asked to collect tax at source. That will be done only by e-commerce operators that act as a platform allowing supplies to be made through them.
Who Can Collect Tax At Source?
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. The vendors would then be eligible to utilise this tax collected to pay their output tax liability. The intention behind this arrangement is to strictly monitor businesses that supply goods and services via e-commerce operators.
One of the concerns about the first draft of the Model GST Law was the non-cognizance of the element of ‘sales return’. This has been rectified in the revised version.
The new draft which clarifies that tax collected shall be only on net sales made over the e-commerce platform. Additionally, one percent each as CGST and SGST have to be collected under the new rules.
The most critical concern for business remains that every vendor on the e-commerce platform will need to register regardless of threshold conditions.
This is likely to be the single biggest obstacle for small and occasional dealers who wish to increase their sales through e-commerce. This will also impact the platform players as such dealers may choose to refrain from availing their services for making supplies.
CENVAT Credit Confusion
Under the current tax regime, vendors selling goods via e-commerce cannot avail credit on service tax. The platform providers may charge for a number of services provided by them to the vendor. Under GST, the place of supply for such services will be determined vide the place of supply provisions of the Model GST Law. Whether the vendor would be able to claim credit of the local GST paid in any state other than his/her state of registration remains unclear. This will require an in-depth examination of the nature of supply of service and the concerned place of supply provisions.
Overseas Suppliers And Multiple Registration
One of the areas that continues to remain grey in the revised Model GST Law is the applicability of some provisions to overseas suppliers transacting with Indian customers through e-commerce operators. Under the current service tax regime, overseas suppliers are now required to take registration in cases of business to consumer supplies and discharge the taxes locally, either themselves or through a representative. It is unclear whether, in different models of e-commerce, such a requirement would subsist for digital suppliers in all cases.
Another area yet to be addressed is whether, for the purpose of depositing tax collected at source, e-commerce operators would be required to obtain registration in every state where suppliers using their platform are situated.
The Model Law has clearly increased the compliance requirements for operators multi-fold.
A Late-Mover Advantage
With exponential growth and increasing investment towards e-commerce, tax certainty is of paramount importance. India does have a late-mover advantage here - of learning from the experience of other jurisdictions. The government is faced with a daunting task of rolling out an unambiguous and clear law. It needs to factor the challenges of administration across multiple states and ensuring healthy compliance by the industry. The revised Model GST Law has attempted to address to a great extent the various peculiarities of e-commerce. Nevertheless, some concerns remain. Considering the importance of this industry, and the proactive approach shown by the government so far, we may expect further improvements and clarifications to the law.
L Badri Narayanan is a partner and Meghna Mohapatra is an associate with well known law firm Lakshmikumaran & Sridharan.
The views expressed here are those of the authors’ and do not necessarily represent the views of BloombergQuint or its editorial team.