Impact of Gst on E-commerce Industry

Introduction

The e-commerce has transformed the way business is done in India. The Indian e-commerce industry has been on an upward growth trajectory and is expected to grow at a Compound Annual Growth Rate (CAGR) of 28 per cent from 2016-20 to touch US$ 63.7 billion by 2020 and overtake the US by 2034. The sector reached US$ 14.5 billion in 2016. Much growth of the industry has been triggered by increasing internet and Smartphone penetration. The ongoing digital transformation in the country is expected to increase India’s total internet user base to 829 million by 2021 (59 per cent of total population), from 373 million (28 percent of population) in 2016, while total number of networked devices in the country are expected to grow to two billion by 2021, from 1.4 billion in 2016.

Total online spending, inclusive of domestic and cross border shopping, is expected to increase by 31 per cent year-on-year to Rs 8.76 trillion (US$ 135.8 billion) by 2018. Cross border shopping by Indians touched Rs 58,370 crore (US$ 9.1 billion) in 2016, and is expected to by 85 per cent year-on-year in 2017. The top 3 countries preferred by Indians for cross-border shopping in 2016 were USA (14%), UK (6%) and China (5%).The Indian consumer internet market is expected to grow by 44 per cent year-on-year to touch US$65 billion in 2017, up from US$45 billion in 2016.

Online travel agents account for the largest market share (70 per cent) in the internet consumer market, while the remaining 30 per cent is occupied by horizontal e-tailing, fashion, furniture, grocery, hotel, food tech, cab aggregators, education technology, and alternative lending among others. The internet industry in India is likely to double to reach US$ 250 billion by 2020, growing to 7.5 percent of Gross Domestic Product (GDP), with the number of mobile internet users growing to about 650 million and that of high-speed internet users reaching 550 million.5 About 70 per cent of the total automobile sales in India, worth US$ 40 billion, are expected to be digitally influenced by 2020 as against US$ 18 billion in 2016.Road Ahead The e-commerce industry been directly impacting the micro, small & medium enterprises (MSME) in India by providing means of financing, technology and training and has a favourable cascading effect on other industries as well.

The total size of e-Commerce industry (only B2C e-tail) in India is expected to reach US$ 101.9 billion by 2020.Technology enabled innovations like digital payments, hyper-local logistics, analytics driven customer engagement and digital advertisements will likely support the growth in the sector. With the increase in the number of electronic payment gateways and mobile wallets, it is expected that by the year 2020, cashless transaction will constitute 55 per cent of the online sales. The growth in e-commerce sector will also boost employment, increase revenues from export, increase tax collection by ex-chequers, and provide better products and services to customers in the long-term.Impact of GST on e-commerce industry:E-commerce or electronic commerce (an online shopping hub) manages the buying and selling of products and services exclusively through electronic channels. E-commerce captures around 33% of the global market with a positive growth in near future.

According to the latest GST council 21st meeting, the registration for all the taxpayers registered under TCS can start their registration from 18th September 2017.Section 43B(e) of the Model GST Law defines an Electronic Commerce Operator (Operator) as every 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. Also, a person providing any information or any other services incidental to or in connection with such supply of goods and services through electronic platform would be considered as an Operator. A person supplying goods/services on his own account, however, would not be considered as an Operator.For instance, Amazon and Flipkart are e-commerce Operators because they are facilitating actual suppliers to supply goods through their platform (popularly called Marketplace model or Fulfillment Model). However, Titan supplying watches and jewels through its own website would not be considered as an e-commerce operator for the purposes of this provision. Similarly, Amazon and Flipkart will not be treated as e-commerce operators in relation to those supplies which they make on their own account (popularly called inventory Model).

The MGL provides that every operator has to register at GST portal irrespective of the threshold limit specified for the registration for GST. This is the biggest disadvantage for small retailers as they work on fixed working capital and will have to pay taxes and apply for a refund later which is a cumbersome process.The success of the e-commerce sector is largely dependent on the increasing number of retail entrepreneurs, who fall in the unorganized retail sector category. The government has included such players in the ambit of GST with an intention of broadening the tax base and has introduced specific provisions for the e-commerce companies.

In the present regime, there is no uniformity in the tax rates among the different states and therefore every state determines its own tax rates specific to the products. For example, a mobile phone in state 1 is taxed under VAT at five percent and in state 2 at 14.50 percent. As a result, the sellers in state 2 would not want to sell locally but would prefer to sell from state 1, resulting in loss of revenue for state.E-commerce operators have set up distribution centers only in certain locations and collect the VAT applicable on sales made from such centers. In order to compensate for the loss of VAT revenue, many states have recently imposed entry tax on goods coming from other states, which discourages sales made from other states. The entry tax acts as a trade barrier, restricts free movement of goods from one state to another and increases the cost for traders.However, such trade barriers will cease to exist as GST is inclusive of entry tax. The destination state earns the revenue from GST on sales regardless of where the sale was made. Further, there is no rate arbitrage under GST because the classification of goods and rate of GST is common across states.

It is mandatory for all e-commerce operators to collect tax at the rate of two percent as TCS on the net value of sales made by suppliers through e-commerce operators. Such TCS has to be deducted in each state and deposited accordingly. This brings in significant compliance challenges to sellers and may discourage sales through marketplace model. However, this may not be applicable for inventory based models, where the e-commerce operator makes the sale from its own inventory. The key purpose of this provision is to encourage compliances under GST and provide a mechanism for the government to track suppliers who sell through e-commerce operators.

The e-commerce operators should report all supplies made by the seller and the TCS collected thereof on a monthly basis. The sales reported by the e-commerce operator will have to match with the sales declared by the supplier himself at the end of every month, and any difference will be added to the turnover of the supplier and consequently be liable to discharge GST on such additional turnover.The e-commerce operator has to report the product/service code and the applicable rates for each item level individually. This requires them to map every sale done by the dealer and ensure TCS is deducted at the right value. The implementation of compliance is cumbersome for both e-commerce operator and the supplier.Additionally, the e-commerce operators will have to register in each state and file the reports separately on a monthly basis. This process increases the challenges in compliance and costs of running the business.

GST mandates that all sellers supplying through an e-commerce operator need to be registered under GST irrespective of the threshold limit of Rs 20 lakh. These sellers cannot opt for composition scheme, where they pay a flat tax at the rate of two percent and do not maintain details of each product sold. In this scenario, it is not feasible for small businesses to maintain a detailed record of purchases and sales and pay higher rate of tax. Because of this, many small retailers may not prefer to work with an e-commerce company, which impacts the business for e-commerce operators.

The GST law has extended the meaning of ‘input tax’ to cover any goods/services used by the company in the course of business, which has widened the ambit of input GST credits. This has removed the requirement to establish the direct nexus of inputs/input services with the final product/service provided by companies. For e-commerce operators and sellers, the unavailability of credit towards excise duty and VAT on goods and service tax on certain services adds to the cost of running the business, which would be avoided under GST on account of increase in credits.ConclusionAs we can see, the GST law may have a negative impact on the e-commerce sector. Given that e-commerce sector in India is one of the most rapidly advancing sectors, and the government is vigorously promoting digitized economy, the introduction of such cumbersome compliances cringe the growth of this sector.Statutory framework introduced by the government should be towards the advancement of business rather than creating obstacles. The GST law should provide an enabling environment that encourages e-commerce operators and suppliers

1. No trade barriers — one nation one tax
2. Tax collection at source (TCS)
3. Increase in compliances for e-commerce operators
4. Mandatory registration of sellers and unavailability of composition scheme
5. Increase in credits