GST for E-Commerce Operators
The Goods and Services Tax (GST) like any other reform is a bundle of cheers and challenges. The e-commerce sector which is growing by gallops has more challenges to face than to cheer. These challenges are specific to e-commerce business and are not applicable to the brick and mortar businesses. Viewed narrowly, these challenges tend to stir a perception that the e-commerce sector, especially the startups are heading out of the frying pan into the fire. A couple of months into the GST regime would make the situation clearer.
No doubt, the GST has put an end to many of the contentious issues concerning the e-commerce sector in the arena of indirect taxation, posed by heterogeneous tax systems till now such as the following:
- Determining the jurisdiction of VAT
- Absence of a facility to set off input credit of service tax paid on listing fee by the vendors to the website owner against VAT payable on sales made by them
- Sale vs. Service confusion which has thrust undue VAT demands in some states
- Increasing litigation on account of entry tax and octroi being demanded on the movement of goods
- Efforts of some states (like Karnataka) to amend VAT law to give themselves the power to levy tax on e-commerce transactions
GST by its guiding rationale of levying tax at the point of consumption has resolved most the above issues but it also brought specific new challenges to the e-commerce sector such as the following:
- Mandatory registration with denial of the threshold exemption limit,
- Tax collection at source (TCS)
- Furnishing of information regarding operations
This article endeavors to discuss these specific challenges.
Definition of E-Commerce Operator under GST
The Government in its anxiety to leave no room for any electronic transaction to escape from tax has broadly designed the definition of an e-commerce operator in the GST Act. Going by the given definition, one could assume that the commodity electronic exchanges might also be covered under GST.
Let us examine the definition of an e-commerce operator as per the GST Law. The GST Act defines an electronic commerce operator as any person who, directly or indirectly, owns, operates or manages an electronic platform which is engaged in facilitating the supply of any goods and/or services; and as a person providing any information or any other services incidental to or in connection with such supply of goods and services through electronic platform. The clause that any other services incidental to or in connection with such supply of goods and services through electronic platform is too broad to unleash the imagination of any taxman.
In the FAQs released by the Government, it is clarified that any person supplying goods/services online on their own account would not be considered as an e-commerce operator. For instance, Nike supplying shoes and apparels manufactured by them or branded by them or bought and sold by them through their own website would not be considered as an e-commerce operator for the purpose of GST. But if Nike fulfills the supply of third party goods through its own website then it falls under the category of ecommerce operator.
For instance, Amazon, Flipkart, Snapdeal etc., are treated as e-commerce operators because they are facilitating the actual suppliers to supply goods through their platform (popularly called Market place model or Fulfillment Model) but they will not be treated as e-commerce operators in respect of those supplies which they make on their own account (popularly called inventory Model or stock & sell model).
Similarly, an aggregator is defined in GST Act, as a person, who owns and manages an electronic platform, and by means of the application and communication device, enables a potential customer to connect with the persons providing service of a particular kind under the brand name or trade name of the said aggregator. For instance, Uber, Ola, KidEngage etc., would fall under the category of aggregators. These definitions of ecommerce operator and aggregators are so broad that most of the websites which are directly or indirectly dealing in goods, services or information relating to goods or services or both are covered under GST. Most of the startups fall either under the category of ecommerce operator or aggregator as they leverage technology to do business online.
Specific Challenges of GST for e-Commerce
The generally available threshold exemption limit of Rs.20 Lakhs across all the states (Rs.10 Lakhs for specified states) is not available to e-commerce operators and they would be liable to be registered irrespective of the value of supply of goods or service or both made by them. This threshold exemption is also not available to the e-commerce operators who operate both under stock & sell model and also fulfillment model. The threshold exemption is also not available to the aggregators and they would be liable to be registered irrespective of the value of supply made by them.
Further, the supplier to an e -commerce operator is not allowed the option of availing threshold exemption limit of Rs.20 Lakhs and is required to be registered in GST. The critical concern is that every vendor on the e-commerce platform will need to register, regardless of threshold, at every state where they make a supply in contrast to the erstwhile existing facility of one central registration for the entire country prevalent under the provisions of Service tax.
For instance, if goods are delivered to a single customer from three different locations, the e-commerce operator will have to either raise three different invoices on the customer — one from each location, or raise a single invoice from the main billing location, but then have other two different locations send internal invoices to the main billing location, and have the main billing location pay GST on these internal invoices.
In this scenario, each of these locations will have to be registered with the appropriate state for GST purpose, file separate returns, pay and claim input tax credit state wise. This provision of separate state wise registration under GST is required for the purpose of seamless flow of input tax credit involved in inputs down the value chain. But, the operational and financial burden that this will place in terms of compliance under GST and administration will add up significant cost to the e-commerce sector.
The Government justifies these provisions on the ground that the net tax effect would be revenue neutral i.e. the net tax outgo after adjusting the input tax credit on all the eligible inputs, input services and goods would be same as that of existing liability. But, the net effect depends on case to case. However, the compliance of these registration provisions poses a great obstacle for small and occasional dealers who otherwise wish to increase their sales through e-commerce. The platform players would also be impacted since some merchants may decide to refrain from availing the platform services for the supplies.
Reverse Charge Mechanism
In GST, reverse charge means that the liability to pay tax is on the recipient of supply of goods and services, instead of the supplier, with respect to notified categories of supply.
As per GST, in case of receipt of supply from an unregistered person, the registered person who is receiving goods or services shall be liable to pay tax under the reverse charge mechanism. Thus, any e-commerce operator who receives goods or services from an unregistered person has to pay the applicable tax. The recipient of supply of goods who is liable to tax shall pay the applicable tax at the earliest of the date of receipt of goods; or date on which payment is made; or the date immediately following 30 days from the date of issue of invoice by the supplier. Similarly, the recipient of supply of services who is liable to tax shall pay the applicable tax at the earliest of the date on which payment is made; or the date immediately following 60 days from the date of issue of invoice by the supplier.
Further, if an e-commerce operator liable to pay tax under reverse charge mechanism does not have a physical presence in any state, then a person representing such operator for any purpose will be liable to pay tax and if there is no such representative, the operator will have to appoint a representative who will be held liable to pay GST.
Tax Collection at Source (TCS)
In GST, the e-commerce operator is required to collect (i.e. deduct) an amount at the rate of 1% on the aggregate value of taxable supplies of goods or services or both, other than the services on which entire tax is payable by the e-commerce operator, made during any month by all registered persons through such operator, reduced by the aggregate value of taxable supplies returned to the suppliers during the said month. The amount so deducted/collected is called as Tax Collection at Source (TCS).
For example, if an e-commerce operator receives Rs.1, 00,000 worth of supplies (goods and services) in a month, and returns Rs.50,000 worth of goods in the same month to the supplier/s, the operator must deduct 1% of the remaining Rs.50,000, that is, Rs.500, as TCS.
The e-commerce operator is required to make such deductions at the earliest of the time of credit of any amount to the supplier’s account or the time of payment of any amount in cash or by any other mode to such supplier. The amount collected (deducted) by the operator is to be paid to the credit of appropriate government i.e. 0.5% as CGST to the Central Government and 0.5% as SGST to the concerned State Government within 10 days after the end of the month in which amount was so collected.
Further, the e-commerce operator is required to file a Statement, electronically, containing details of all amounts collected by them for the outward supplies made through their website, within 10 days of the end of the calendar month to which such statement pertains. The said statement would contain the names of the actual supplier(s), details of respective supplies made by them and the amount collected on their behalf. Such TCS which is deposited by the operator into government account will be reflected in the cash ledger of the actual registered supplier (on whose account such collection has been made) on the basis of the statement filed by the operator. The same can be used at the time of discharge of tax liability in respect of the supplies by the actual supplier. This provision is likely to deter the small and occasional dealers from coming onboard with the e-commerce operators because of blockage of their funds.
Generally in the case of small and occasional dealers especially in grocery sector, the net margins are not much and the TCS provision along with the cut payable to the website owner evaporate the thin margins enjoyed by them and might act as a deterrent to come online.
TCS would also impact the small and occasional dealers because GST does not give them the threshold exemption and thereby enhances their tax outgo. Many of the dealers were below the threshold till now, and have not paid VAT, Entry Tax or Service Tax earlier. The TCS provision by being specific only to the electronic commerce and by not applying to the physical brick-and-mortar retail outlets is discriminatory. These provisions are delayed for the time being to enable smooth rollout of the GST but would have to be complied with from the future notified date.
Concept of matching in e-commerce provisions
The details of supplies and the amount collected during a calendar month, and furnished by every e-commerce operator in their statement will be matched with the corresponding details of outward supplies furnished by the concerned actual goods or service supplier in their return filed for the same calendar month or any preceding calendar month. Where the details of outward supply, on which the TCS has been collected, as declared by the ecommerce operator in their statement does not match with the corresponding details declared by the actual supplier the discrepancy will be communicated to both persons.
If the discrepancy is not rectified by the actual supplier in their return for the month in which discrepancy is communicated, it shall be added to the output liability of the said actual supplier, for the succeeding calendar month. The concerned supplier shall be liable to pay the tax payable in respect of such supply along with interest on the amount from the date such tax was due. This procedure will introduce effective tracking of transactions and ensure that all supplies are captured and taxed appropriately.
Furnishing of information to the Government
An officer not below the rank of Joint Commissioner of GST may require the operator to furnish details relating to the following:
(i) Supplies of goods / services effected through the operator during any period;
(ii) Stock of goods held by the actual supplier making supplies through such operator in the godowns or warehouses belonging to the operator and registered as additional place of business by the actual supplier.
The operator is required to furnish the above information within 5 working days from the date of notice asking for the information. In case of failure to furnish such information, the penalty could be up to Rs. 25,000/-.
These provisions are redundant because the e-commerce operator is required to file a monthly statement containing the names of the actual supplier(s), details of respective supplies made by them, the amount collected on their behalf and details of TCS for the outward supplies made through their website. Such deliberate redundant provisions might have been contemplated in view of the history surrounding taxation of online transactions of e-commerce operators and their suppliers.
No More Price Advantage in e-commerce
Most of the e-commerce sales are price sensitive and the goods often sold are procured from or supplied by the dealers located in states where the rate of existing VAT is lower when compared to the consuming state or the state of delivery.
For instance, Karnataka has a VAT rate of 5% on mobile phones, whereas Maharashtra has VAT rate of 13.5%. This price advantage has helped e-commerce operators to compete better with local retail stores. Post GST, because of the uniform rate of across the nation and mandatory payment of tax in the consuming state, this kind of price advantage is no longer available to the e-commerce operators.
There have been a lot of discussions on these provisions, and the Trade bodies have represented to the Government at various levels. As a result, some of the provisions like TCS have been deferred to a future date. It is presumed that at least the provisions like calling for information which are redundant and vexatious are to be withdrawn.
Next in the series: GST for Technology Companies
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