What does GST mean for your business? by Akshay Hegde
Foreword
With the GST constitutional amendment bill being passed by the parliament recently, this monsoon session hasn’t turned out to be a complete wash out. On the contrary, there is fresh hope regarding renewal of the economy with the implementation of the GST right around the corner.
Now, there’s an undeniable positive sentiment regarding this keystone in indirect taxation which is largely linked to the consequences associated with the introduction of GST. One of the most crucial implications to its implementation is the concept of ‘one tax, one market’, which is aimed at remedying the headaches associated with multiple indirect taxes by providing an uncomplicated tax structure and fungible credit chain. With E-Commerce companies being heavily bolstered by the FDI norms for marketplace models, there needs to be a clearer understanding of how such a positive upheaval on the indirect tax system will affect the quickly ballooning E-Commerce sector.
This article is aimed at breaking down the ramifications associated with GST being brought in, along with certain personal views on how proposed changes can be executed.
Overview
To understand the comprehensive impact that GST can have on businesses, one must understand how the current system of indirect taxation is levied. There are certain taxes levied by the central government, while the remaining are under the state’s jurisdiction. Today VAT is levied on the seller of the ‘goods’ by the state in case of intrastate sales, while CST (Central Sales Tax) is levied by the center, but administered by the state VAT Dept. on the sale of ‘goods’ when the transaction is deemed as interstate. Levy of Service Tax on the other hand has been the prerogative of the center regardless of intra/interstate transactions. There are certain other key taxes such as Central Excise duty that is levied on manufacture of goods by the central government and Custom Duty which is charged to the purchaser during import of goods into the country.
Having a general idea about some of the most prominent indirect taxes, let us dive into what are the problems associated with such a tax structure when it comes to online E-Commerce marketplaces today and how such problems would intertwine with the likely structures in place tomorrow.
Addressing Big GST issues
Firstly, the biggest question that needs clarity is — “Which entity is liable to pay tax?”. When one looks at online marketplaces, the business models are such that the marketplaces only act as intermediaries providing ‘services’ to vendors on their platforms. At no point do these marketplaces take ownership of these goods, even if they provide value added services like warehousing, packaging, etc. (to improve the customer experience of platforms), and hence the onus of paying the VAT/CST in case of online marketplace based transactions lies solely on the vendors. The marketplace needs to be acknowledged as an intermediate entity providing services and not as the entity liable to pay the taxes, as certain authorities would like to claim.
Another critical problem that needs to be addressed is the ambiguity associated with waybill compliance, and as to who is responsible for adhering to such norms when transactions and movement of goods happen between different states. Usually the vendor is responsible to provide the waybill copy along with the consignments, however due to lack of clarity E-Commerce players are often hauled up for non-compliance. In UP, it is the consignee’s responsibility to furnish the waybill to the consignor, authorizing movement of goods into the state. Though enforcement of Waybill compliance is the prerogative of states to track the inbound and outbound movement of goods, it is against the notion of free movement and free trade which is harbored in the concept of ‘one tax, one marketplace’.
Thirdly, ‘How to deal with Entry Taxes’ is an important question one needs to have clear answers to in order to appropriate the payment of such dues correctly. In E-Commerce transactions, the forwarding and logistics is usually handled by marketplaces who often utilize their warehouses inside other states/regions which levy entry tax (such as Octroi). This does not imply they are responsible for the payment of such entry taxes, and if they are not liable to, does it make the LSPs (Logistic Service Providers) liable to adhere to such guidelines? Anyhow, there is large consensus that such entry taxes would be subsumed into the GST structure and hence ease compliance when it comes to who is responsible for a particular levy.
When we talk about indirect taxes levied on the interstate sale of ‘goods’, another important question arises as to — ‘Which state is responsible to administer the VAT/CST?’
Since VAT/CST is a central levy that is administered by state authorities in case of interstate sale of goods, there needs to be clarity as to which state is responsible for discharging such taxes. Online marketplace, having many URD’s (Unregistered Dealers) who are surely left out of the credit chain, make it even more difficult to appropriate which state can administer such a levy. There needs to be a clearer understanding regarding this subject and the GST Bill will need to incorporate such clarifications.
Additionally, a large problem with such complex indirect tax structures is the credit impasse that occurs while dealing with service tax and VAT/CST. Since only input VAT is creditable against output VAT/CST, the lack of credit offsets on subsequent transactions leads to heavier costs for both customers of such marketplaces and the marketplaces themselves. To help you understand how a fungible credit structure between the various indirect taxes impact costs of doing business, we have reworked the ubiquitous credit set-off table below.
The GST Regime
The system under GST regime will be a lot simpler, cleaning up the previously tax cascading structure, compliance issues, revenue seepages by ushering in a period of economic revival and level playing field. The GST has been designed to replace almost all indirect taxes levied on the sale of goods and services and will also affect how companies operate their business to a large extent.
The GST will be levied on goods and services in the following format:
- SGST (State GST): Levied by the State on the sale of goods and services
- CGST (Central GST): Levied by the Center on the sale of goods and services
- IGST (integrated GST): Levied by the Center on the sale of goods and services in case of interstate transactions.
A bevy of indirect taxes are proposed to be subsumed by the GST; the intricacies are elucidated below:
The following taxes are proposed to continue to remain independently in place without being subsumed into the GST:
· Basic Customs Duty (CD)
· State Excise Duty
· Electricity taxes and duties
· Stamp duties
Certain taxes on consumption of alcohol, entertainment etc will also remain independent of the GST until an alternative to such a proposal is brought forward.
To better understand the availability of a larger credit pool, in case of GST implementation, let’s review the table below.
Conclusion & Observations
With GST coming in, the E-Commerce space will see an elimination of the cascading tax structure, higher credit availability and hence lowering of cost for services. However, a higher output tax rate may slightly negate the effect of additional credit fungibility. Also, since GST is a consumption based tax, the Point of Supply for B2C transactions will be the location of the service provider but for B2B players the Point of Supply (POS) is likely to be the location of the service recipient. Interestingly, this may cause certain issues for B2B players because currently input service tax credit can be set off against output tax because they are both levied by the center under one registration. In the above case, if the POS is taken to be the place of service recipient, then E-Commerce companies may not be able to set be able to set off their output tax liability because the company may require a registration in the state of the service recipient. In our opinion then, in order to decrease compliance issues for B2B players, even though the transaction may be defined as intrastate, it would be better to have it deemed interstate for simpler credit chain utilization (where in input GST credit can be used to set off the output IGST liability without much compliance issues).
Apart from the above mentioned impacts, with the implementation of GST we would likely see higher working capital requirements coming into play all be it with a larger available credit pool. Also, since GST is based on the premise of ‘one tax, one marketplace’ the need for waybills or transit forms disappear. Since each transaction is linked to the GST platform there is no need to have added compliance to monitor the inward and outward movement of goods. This would enable free flow of goods which is in line with the concept of introducing the GST bill.
