Impact of GST on E-Commerce in India:

Introduction:

E-Commerce in India is a classic case of tax laws trying to do a catching up with emerging business model. An E-commerce transaction is complex due to involvement of both service and goods. The E-commerce portal provides a platform for sellers to meet customers (market place) and apart from this service, it also enables advertising and promotion services, courier or logistics services etc. The goods sold through the platform could be either goods or service (Ex: Music, tickets, e-books, software and games etc.). A number of e-commerce transactions are also undefined in tax laws (Ex: e-wallet, gift vouchers, drop shipments, advance receipts, COD etc.).

As a result, today ecommerce in India is mired in a host of taxes: VAT / CST / Excise / Service Tax / TDS with more than one tax applicable on any given transaction. The prevalence of state level statutory forms / e-way bills etc. make it complex to do interstate transactions. Market places also need to comply with requirements of registrations and declaration of turnover to multiple state and central tax departments. E-commerce ‘fulfilled by market place’ model has been challenged by various state governments (Karnataka and Delhi) leading to litigation.

Under GST, India would become a common market and drive uniformity and reduce compliance costs. In the prevalent indirect tax regime, due to restrictions on cross utilization of input of central taxes against state taxes there is price escalation due to taxes sticking to products sold.

This article examines the hurdles faced by e-commerce companies in current regime and likely impact of GST.

Impact of Tax Rate:

The service provided by e-commerce companies is currently charged at service tax rate of 14.5% (15% from June 2016) under GST this would jump to 18% (assuming standard rate). The goods sold on e-commerce platforms are typically charged at lower VAT rate of 5-6% or higher rate of 12-14% based on prevailing VAT rate of the state in which the seller is located and based on nature of transaction (intra or interstate). However under GST the applicable rates would be 12% (merit rate) or 18% (standard rate). All these changes are likely to lead to price escalations at least in initial phase of roll out.

However, currently sellers are not availing input on the 14.5% service tax paid to market place (Amazon, Flipkart, Snapdeal etc.) and logistics providers and these costs stick to the product. Under GST since input would be available on these expenses, resultant elimination of cascading effect would lead to reduced tax liability for seller resulting in lower price to end customer in the long run.

As interstate transactions would become tax neutral vis-à-vis local sales under GST, the market for a seller would get widened.

Complications:

Although tax rate is proposed to be uniform across India, there would still be 3 rates (merit rate of 12%, standard rate of 18% and luxury rate of 40%) and with dual GST model there would be CGST (Central), SGST (state) and IGST (integrated). This would dilute the need to have a ‘desirable GST’ of single rate. Further complications could arise if centre mulls a narrow tax rate band for each state (Ex: 7-9% rate band in place of 8% SGST) instead of a single SGST rate. In which case, for interstate transactions, a seller would require to know the prevailing IGST for each state for each product where he is selling into (destination principle) as against current behaviour of knowing applicable tax rate of state in which he is operating (originating state behaviour).

For e-commerce companies who buy stock, store inventory and sell, in place of 12.5% Excise they will have to shell out 17-18% GST thus driving up prices. They will also be taxed on unsold inventory held in warehouses.

Registration:

E-Commerce companies currently have single centralized service tax registration for pan-India operations, however under GST they would be required to register in all states and Union Territories where they operate and file returns accordingly. E-Commerce companies will also be required to obtain ISD (Input Service Distributor) registration for transferring inputs across states / registrations.

Compliance:

Return Filing:

Due to multiple registrations the compliance requirements would jump manifold for E-commerce companies with need to bifurcate state-wise the services delivered. E-commerce companies would be required to file 3 returns per month (GSTR 1, 2 & 3) per registration (90 pan-India) as opposed to one Service Tax return being filed currently.

Sellers would be required to file 3 returns per month as opposed to quarterly return filing prevalent in most of the states currently. Due to predominance of B2C transactions in E-Commerce, the sellers may upload consolidated Invoice level information with additional requirement to provide HSN code level detailing. Elimination or subsuming of entry tax is a big relief to seller in terms of cost saving and compliance needs pertaining to filing of entry tax return and payment.

With emergence of requirement to file e-commerce transactions separately (separate Annexure and returns) in many states (Delhi, Kerala, Maharashtra, Tamil Nadu etc.) GST would bring the required respite and drive uniformity.

E-commerce is characterized by high prevalence of goods returns (5 to 15%) however due to automation of entire process of return filing and revision complications related to refunds and ITC (Input Tax Credit) reversals is likely to be smooth.

Way Bills and interstate check posts:

Some of the complications related to obtaining way bills in case of interstate supply will likely to persist for many more years even after GST is introduced till a pan-India common portal or system for obtaining e-way bills is developed. Interstate check posts will only get eliminated in the distant long term.

Point of Supply:

The destination based consumption tax that GST is, determination of point of supply becomes imperative especially in the case of interstate transactions. In case of goods, the address of delivery may be considered as point of supply however in case of digital goods downloaded definition of point of supply becomes critical. A normal resident of Karnataka, ordering flight tickets while on a trip in Hyderabad and downloading the same in Delhi will IP address be considered or the declared address? In addition to mobile and e-mail ID, portals would be required to obtain address with state details before providing any digital service.

While determining place of supply of goods to customers may be easy to determine, the place of supply of services by ecommerce forms to the sellers may be little difficult (Ex: for large vendors like shoppers stop who supply from multiple locations).

Clarity needed:

Clarity is required on treatment of discounts borne by platforms as well as by sellers and calculation of the resultant taxable value for GST. Treatment of composite offer (Goods + Service Ex: A tour package with cab service, restaurant, food and flight tickets) has to be clearly defined in GST.

Cash flow impact:

Sellers as well as E-Commerce players should brace themselves for delayed or reduced cash flows resulting from below provisions in GST:

1.       Branch Transfer: As any supply would be taxable, local or interstate branch transfers would attract GST. Although fully creditable a temporary blockage of cash would result.

2.       Similarly, exporters will have to procure duty paid inputs and claim refund after exporting (zero rated) and claim refund leading to cash blockage.

3.       Businesses importing goods through e-commerce platforms would have to pay IGST on reverse charge basis (fully creditable) impacting cash flows.

4.       Although refunds (Accumulated ITC, reversal of deposit, favorable dispute settlement etc.) process is automated, claims would be restricted to quarterly leading to short term cash crunch.

5.       Sudden increase in tax rate from prevailing 5% (for particular group of commodities) to 18% under GST would result in increased tax outgo leading to cash flow issues that sellers would have to brace for.

Warehousing and Logistics:

Large sellers as well as E-commerce players need to reengineer the warehousing strategy with consideration of client proximity over tax impact. Current behaviour is to open warehouse state wise to avail concessional CST rate of 2%. On the positive side pricing of product, profitability would be more predictable and agnostic to destination of customer.

Business Process Change:

Ecommerce companies like Amazon and Flipkart operate under the market place model, wherein they store the goods from sellers at their warehouse and supply to end users upon receiving orders. These warehouses are registered as additional place of business under local VAT by sellers and e-commerce companies do not register under VAT.

Under GST both ecommerce companies and sellers would have to simultaneously register these warehouses as Principal and Additional Place of Business, respectively. This would be challenging as these warehouses do not have dealer wise physically segregated or designated areas within the warehouse.

Also the treatment of stock transfer from seller to the warehouse under GST would be different as any ‘supply’ is taxable. This might lead to cash flow getting impacted and input can be used for set-off after subsequent sale to end customer.

However, on the positive side the ‘Fulfilled by Amazon’, ‘Flipkart Advantage’ or ‘Snapdeal Plus’ model wherein dealers store their products at warehouse is currently disallowed in states like Karnataka may be revived. Currently registration of market place warehouse as additional place of business is disallowed and under GST regime this may change.

Conclusion:

In conclusion, from E-commerce perspective, the benefits from GST far outweigh the perceived disadvantages. GST would provide the much needed legal framework for e-commerce firms to operate in India. 

(Views expressed are strictly personal)