Impact of GST on Online Market Place

Commerce is the lifeline of the human society and the introduction of the internet has made things and circumstances more favorable than problematic. In the Indian scenario, shifting from the traditional brick and mortar structure to the online structure, the rise of ecommerce has been meteoric. Statistics say that in the year 2016, about 69 million consumers purchased goods/ services online, which is expected to rise to 100 million this year. By the end of 2018, the Indian e-retail sector is expected to touch 17.52 billion USD and generate a revenue of 100 billion USD by the year 2020.

In the present day, in all urban and semi urban areas, there has been a strong growth of ecommerce and the population has been keen on using ecommerce for carrying on business activities. Online marketplaces are a relatively new phenomenon and the existing indirect tax regime is uncertain and unsuccessful in providing complete clarity on the appropriate tax treatment of e-commerce transactions. In order to help eliminate such ambiguity, the GST regime takes into account the existing anomalies and addresses them suitably.

The Central Goods and Services Act, 2017 (“CGST Act”) defines ‘electronic commerce’ (“E-commerce”) to mean the supply of goods or services or both, including digital products over digital or electronic network. Any person, who directly or indirectly owns, operates or manages an electronic platform that facilitates the supply of any goods and services, is referred to as an electronic commerce operator (“Operator”) under the Act.

Relevant sections reproduced below

Section 2(44) “electronic commerce” means the supply of goods or services or both, including digital products over digital or electronic network;

Section 2(45) “electronic commerce operator” means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce;

An e-commerce operator has to be compulsorily registered under the CGST Act. The benefit of threshold exemption is not available to e-commerce operators and they would be liable to be registered irrespective of the value of supply made by them.

The composition scheme which has been introduced under CGST Act is also not available for e-commerce operators as the law has explicitly excluded e-commerce operators from the same. This scheme is primarily aimed to reduce the burden of compliance for small and medium businesses. Under this scheme, businesses are required to file returns quarterly instead of monthly and pay taxes at nominal rates up to 2%.

Section 52 of the Act casts an obligation on e-commerce operators to collect tax at source. E-commerce operator are required to collect an amount calculated at the rate not exceeding one percent of the net value of taxable supplies. ‘Net value of taxable services’ refers to aggregate taxable value of goods or services other than services notified in Section 9(5), made during any month by registered taxable person, reduced by aggregate of taxable supplies return to the supplier during the said month made through it, where the consideration with respect to such supplies is to be collected by such operator.

For instance, Mr. X is a trader who sells bags online on abc.com India. He receives an order for Rs 5, 000 inclusive of tax and commission. Abc.com charges a commission of Rs 100. Abc.com would therefore need to deduct 1% tax (TCS) on the amount, excluding the money paid as commission (Rs. 100) and GST (Rs. 900 if GST @18%). Abc.com would, thus, be deducting tax for Rs 40 (1% of Rs. 4000).

Such collection is to be made during the month in which supply was made. The amount collected by the operator is to be paid to appropriate government within 10 days after the end of the month in which amount was so collected. Every operator shall furnish electronic statement containing the detail of outward supplies of goods and services including the return of supplies and the amount collected in a month, within 10 days from the end of month.

The supplier is entitled to take credit of such TCS in his Electronic Cash Ledger. The supplier will have to file monthly return under GST to claim the credit of the amount collected by the e-commerce operator. The operator is also required to file an annual statement by 31st day of December following the end of the financial year in which the tax was collected.

Although the GST combines the numerous indirect taxes and lessens the burden of e-commerce companies to comply with various taxes imposed by state governments, the proposed tax collection has not been welcomed by them. More than the rate of collection, the operators are unsettled about the increase in the compliance requirements.

A key concern raised by such operators is that they are neither the buyers nor the vendors; they are merely facilitators or platforms for sellers to market and sell their products to potential customers.   Even though they are just third party intermediaries, an increased burden of collecting tax at source has to be borne by them. With this clause, the online marketplaces will be required to revise their processes and systems to comply with the provision leading to the increase in expenditure for paper work, ultimately negatively affecting the working capital.

Furthermore, return or cancellation rate in the country is quite high and majority of the transactions are on Cash on delivery, reconciliation for which happens after a fortnight. This would pose a burden on the operators for seeking refund in case of cancelled or returned orders on which tax has already been deducted. Moreover, the operators shall have to manage their accounting and reconciliation accordingly.

With the increase in the volume of transactions and submissions of various statements, compliance cost for the operator shall certainly rise.

Following Bentham’s philosophy of the greater good of a greater number of persons, the revolutionary move of GST is a step forward towards the greater good of the people of the country. Though the provisions require some more clarification and there will be an increase in compliance and paper work, the clear and well defined laws will eliminate the ambiguity existing in the present system and insulate such operators from arbitrary taxes levied by the state Governments. It tries to prevent one of the biggest issues i.e., of tax evasion, henceforth, expected to have a more positive effect than adverse. The e-commerce operators might at its initiation find it difficult, but in the long run GST would be a welcome move by them too.