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Effect of Goods and Services Tax on E-Commerce Industry

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We have already discussed about Goods and Services Tax, its features and benefits. The new tax that will replace the Indian indirect tax structure is set to be implemented on July 1, 2017. And it seems that all the businesses are figuring how to be compliant after this revolution? While the new tax is predicted to increase revenue and unite the market, we are focusing on how it will impact Indian e-commerce market?

Before we detail about the impact of the GST on e-commerce business, let’s have a look at the current status of online market in India.

According to a study conducted by Internet and Mobile Association of India, the e-commerce market has crossed over Rs. 211,005crore in December 2016, and this is estimated to reach $100 billion by year 2020. With the uprising of e-commerce, a significant rise in online marketplaces has been witnessed.

Today, India has many national and international marketplace operators that are helping all types of business owners growing their horizon.

For those who are not cleared about a marketplace concept, it’s a large online platform that enables third-party selling through their platform. For this, they require you to register as a seller and pay a subscription fee or commission on per sale value. The benefit of the model for third-party sellers is that they get an access to a large customer base who trust the marketplace over the seller for they know that the marketplace allows only genuine sellers.

Certainly, the marketplaces such as Amazon, eBay, Flipkart, Snapdeal and others have worked hard to develop them as a brand. And now their brand value is helping the registered sellers grow. Marketplaces also have many other benefits for sellers. They provide order fulfillment facility, help build sellers’ brand, and sellers don’t have to invest much in starting business online.

The benefit that customers get from buying through a marketplaces is that they have multiple sellers to compare product and price.

Now that you have understood what a marketplace is, let’s move on to what will happen to e-commerce industry in new tax case.

Impact on Online Trade

According to industry experts, the new tax will help resolve many supply chain that impact the online business. Presently, there is a big confusion on the tax treatment of marketplaces and aggregators as there are different tax regimes in different states. With GST, there will be clear and defined laws that would remove this ambiguity and put the operators  in better position against arbitrary levies imposed by State governments.

However, higher compliance challenges are expected that would require more clarity and certainty. Also, sellers have to be acquainted with terms used to define the structure. Here we have put few terms and points to consider for better understanding.

e-commerce Operator

Any person who directly or indirectly owns, operates or manages an electronic platform that enables the supply of goods or services, or a person who provides information/ service in connection to such supply is an Operator. For example, Amazon is an e-commerce operator because it provides a platform for actual sellers to supply goods through its online facility (such is a marketplace). In contrast, Titan manufactures watch and sell through its own website. So it isn’t third-party service provider as it is operating its own business.

Aggregator

An aggregator will be the one that owns or manages an electronic platform and facilitates a service provider to connect with a potential customer through a communication device or application. The best example here are Ola and Uber.

Registration Requirements

As there is no threshold exemption, any operator and aggregator big or small has to register for GST. A pitfall here is that the seller has to register in every state he is expecting to sell because under GST law, the seller has to register in states he is supplying goods.

Tax Collection at Source

According to the new tax regime, operators have to deduct a specific percentage as the GST liability and deposit it with government. This complete mechanism is termed as ‘Tax Collection at Source (TCS)’. What is troublesome here is that the seller has to file monthly return to claim the TCS credit. This will increase sellers trouble and also impact the liquidity.

Benefits of Goods and Services Tax for E-Commerce

  • Shipment and returns will be done more efficiently across the country. Moreover, businesses will execute more efficient supply chain strategies that will be warehouse centric instead of tax requirement centric.
  • With uniform tax structure, product price and margins can be better calculated on uniform basis.
  • Companies often find loopholes in existing strategies of sourcing, distribution and warehousing to minimize their tax liabilities. With GST, this practice will be limited to a greater extend.
  • All merchants have to declare sales done via different online channels every month. Similarly, aggregators are also required to disclose sales and return data in their tax filing. That means, merchants won’t be able to misrepresent their accounts.
  • There is a proposal for public compliance rating for each registered merchant. It will help operators identify authentic tax payers, thus improving the quality of sellers on the marketplace.
  • Many traders buy online with discounts and festive offers just to sell the products at higher rates later. This hurts the operators who want to acquire new users through different offers and plans. With GST this practice won’t be possible as there will be a monthly online filing with GSTIN of the purchaser that can track any fraud.

Issues in Implementing Goods and Services Tax on E-Commerce

  • The GST would cast an obligation on every operator and aggregator to collect TCS and deposit applicable GST when payments are made to suppliers.
  • Under the current tax structure, e-commerce operators have to follow a single central tax legislation. However, the GST would cast an obligation on every operator and aggregator to collect TCS and deposit applicable GST when payments are made to suppliers. Moreover, the e-commerce companies also have to adjust with additional compliances in states where their suppliers are located.
  • Under the GST law, any transaction without consideration is treated as supplies and even the goods are transferred between the warehouse of same company, they will be taxed. However, the tax then is considered credit but this will increase cash flow blockage.
  • In the new law, discounts are divided into two categories – Pre Supply Discount and Post Supply Discount. The former is applicable before or at the time of supply and not considered a ‘transaction value’. While the later will include ‘transaction value’ but only in a condition where it is connected to a relevant invoice. Now the problem is that discounts fall under the ambit of post supply and therefore needed to be reanalyzed.

Conclusion:

E-commerce sector contributes significantly in structuring Indian economy. With the current tax law it won’t be possible to reap the full benefits of this rewarding sector. Therefore, a more stable tax system is required as a remedy. With GST, it is predicted that many problems such as tax issues and problems with supply chain management will be resolve. This will enable faster shipping and reduce paperwork formalities.

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