Plagued, as it is, by indirect tax disputes and ambiguities, the implementation of GST is expected to usher in a uniform tax regime and bring some clarity to indirect taxation in the e-commerce sector.
India is at the threshold of one of the biggest tax reforms it has ever seen - the Goods and Services tax (GST). Despite delays in final implementation of GST, the Indian government is now aggressively pushing for its introduction by 1 April 2017. Whether GST becomes a reality in such a short span of time is yet to be seen, but, the need for GST cannot be understated.
The Constitution Amendment Bill which seeks to amend the constitution of India to introduce GST (GST Bill), was passed by the Lok Sabha on 12 May 2015 and is currently awaiting passage by the Rajya Sabha. In the interim, the Central government has rolled out a draft version of the model goods and services tax law (Model GST Law), setting out provisions on taxable event, place and time of supply, credit utilization etc.
Trilegal is releasing a series of updates starting with the impact of GST on the e-commerce sector to provide a better understanding of the impact that the Model GST Law will have on key sectors of the Indian economy.
Impact on E-commerce
Currently, the federal indirect tax structure with different tax regimes in various states has led to confusion and uncertainty on the tax treatment of online marketplaces and aggregators. It is felt that having clear and defined laws will help remove the ambiguity that currently exists in this sector, and insulate such operators from ad hoc laws and arbitrary levies imposed by State governments.
To this end, the Model GST Law has incorporated a separate chapter on e-commerce transactions. However, the proposed Model GST Law may result in higher compliance challenges for the e-commerce sector and open up other issues that would require further clarity and certainty.
Who is covered?
The Chapter defines an 'electronic commerce operator' to mean a person who owns, operates or manages an electronic platform engaged in facilitating supply of any goods/services or in providing any information or any other incidental services. The term 'aggregator' has been separately defined to mean a person who owns and manages an electronic platform to enable a customer to connect with persons providing a service under the brand name of the aggregator. An aggregator (as defined) in the Model GST Law, however, has not been specifically subsumed in the definition of an e-commerce operator.
In our view, though an 'aggregator' has been separately defined, it could be argued that an aggregator should be covered under the definition of 'electronic commerce operator' given that an aggregator is also a person who maintains or operates an electronic platform for facilitating supply of services. The only distinction between an aggregator and other e-commerce operators is that an aggregator provides underlying services under his brand. Consequently, an aggregator would also be required to adhere to the process of tax collection at source and other requisite compliances in the Chapter.
Who is not covered?
Online retailers who supply goods/services on their own behalf are not covered under the definition of electronic commerce operator and therefore the process of tax collection at source and other requisite compliances in the Chapter will not be applicable.
What are the implications?
Electronic commerce operators who are engaged in operating or managing online platforms or websites through which supply of goods/services are facilitated, would be required to collect tax at source (out of the total amount payable to the supplier), and deposit the same with the government. Such tax collection at source (TCS) is to be made at the time of credit of the amount payable to the account of the supplier or at the time of payment to the supplier, in cash or any other mode (whichever is earlier).
Despite the availability of tax exemption (based on their turnover) to small service providers, it appears that GST will still need to be collected at source by e-commerce operators from small suppliers, even when their turnover does not exceed the threshold exemption. Further, it is not clear whether refund of tax paid would thereafter be available to small suppliers.
Additionally, there appears to be a drafting anomaly on account of the wide definition of electronic commerce operators and the application of the TCS provision. The TCS provision stipulates that tax is to be collected by an electronic commerce operator at the time of credit of amount to the supplier, however, no carve-out has been made for certain electronic commerce operators who do not receive any payment or who do not act as a payment pass through, such as Quickr, Olx. Such operators merely facilitate supply, with the payment being made directly between the supplier and the end customer and therefore they cannot be expected to comply with the TCS requirement, even though they are currently covered in the definition of an electronic commerce operator.
Higher compliance costs
The Model GST Law casts an obligation on every electronic commerce operator to collect tax at source and deposit applicable GST when payments are to be made to the supplier. This will significantly increase the onus and compliance burden on electronic commerce operators, as many of them have a large number of vendors.
Moreover, in the current regime, e-commerce players are treated only as service providers and are therefore required to comply with only one central service tax legislation. Under GST, with the burden of TCS, such electronic commerce operators will also be required to undertake additional compliances in States where the supplier is located.
Stock transfers to be taxed
Under the Model GST Law, specified transactions without consideration would also be treated as supplies. Intra-state and inter-state stock transfers, between branches or warehouses of a single e-commerce entity, would be deemed to be supplies, subject to GST. Though the tax paid would be available as credit to the entity, this may result in cash flow blockages. Example, where large quantities of goods are stock transferred, tax liability would arise at this first stage which can only be offset at the time of final supplies by the e-commerce entity.
Credit available only when tax is paid
Credit can only be claimed on taxes which have been paid to the credit of the government.
Valuation issues on discounts/incentives to continue
Under the Model GST Law, the 'transaction value' is taken as the value of goods/services. Whether discounts get included in the 'transaction value' depends on the category they fall in. Discounts under the Model GST Law have been categorized under two heads:
- Pre-supply discounts: Discounts allowed before or at the time of supply, which are permitted in the normal course of trade practice and reflected in invoices, will not form part of the 'transaction value'.
- Post-supply discounts: Discounts given after effecting supply are included in the 'transaction value' only in cases where such post-sale discount, as per agreement, is known at or before the time of supply, and specifically linked to relevant invoices.
Under the current Value Added Tax (VAT) regime, VAT authorities often insist on including these discounts in the assessable value and e-commerce retailers in general, therefore charge VAT on the non-discounted price to avoid disputes. Current definitions do not adequately put to rest this controversy. Cash backs, promo codes etc. would be in the nature of post supply discounts and may have to be re-analyzed in view of these changes.
Though the roll out of GST may lead to greater compliances for e- commerce players, its implementation could bring in significant benefits, such as:
Removal of cascading taxes: The e-commerce sector will gain significantly from the removal of restrictions on cross utilisation of credits. Currently, traders are denied credit of service tax paid on input services such as warehousing, logistics, commission of marketplace and service providers are not allowed to claim credit of VAT paid on goods that are used for providing output services. This cascading results in a significant blocked input tax cost for this sector since VAT is applicable on the output side, whereas most input costs are services.
The GST model will therefore facilitate seamless credit across supply chains, with tax set offs available across the production value-chain, both for goods and services. This will result in reduction of cascading effect of taxes, therefore bringing down the overall cost of supplies. It is hoped that this cost benefit would be ultimately passed on to the customers or help in increasing the books of the companies.
Consolidated tax rates: Currently, there are differential rates of VAT for the same goods in different States with further fragmentism of VAT rates. This has in the past resulted in classification disputes. However, GST rates at both the Central and State level are expected to be uniform and harmonised which would reduce disputes.