“The consensus we arrived with States for amending the Constitution to implement GST is a major breakthrough. This alone has the potential to make India competitive and attractive for investment.” ~ Narendra Modi, PM, India
India, on 1st of July, 2017, is all set to ink a new chapter in its constitution with the introduction of GST bill. After clearing the constitutional amendment in both the houses of Parliament, the bill is aimed to provide better indirect tax administration and bring an efficient law that will check tax evasion. Despite the fact that it is all set to affect every sector of India, the eCommerce platform is expected to be the most affected one them all. India is poised to become the second largest online marketplace in the coming year after China. The write-up attempts to present an overview on GST and it’s impact on the eCommerce marketplace. GST is a complicated reform like most of the taxation matters.
The write up has complied the various aspect of GST and its impact on the eCommerce platform. Listed below are the points covered:
1. Current taxation system
- Issues with current system
- Threshold limit
- Tax collection at the Source
3. Effect of GST on online marketplace
4. Advantages of GST on eCommerce
As per constitution, the current taxation system is divided into center and states. There are certain exclusive areas where both the levels of government levy tax.
In the current taxation structure, states have multiple rates, including the VAT along with additional taxes on inter-state trade. The standard VAT rate for goods in most of the states is about 12.5-15% while standard rate at the Centre is 12.5%. The combined rate ranges to a minimum of 25%.
The taxes are further divided into:
1. Direct taxes
Income tax is a tax that is levied on the income or profits of the person who pays it and includes the tax on the company profits, rather than on goods or services. These taxes are referred to as direct taxes and are an exclusive domain of central government.
2. Indirect taxes
On the other hand, the tax levied on goods and services rather than on the income and profit is known as an indirect tax. This is again an exclusive domain of central government. While the taxes on consumption are the exclusive domain of state governments.
The central government levies its indirect tax called central excise on every product that has to be manufactured before it is consumed. Consider a product ‘A’ that is to be manufactured. The central excise will be levied on the factory gate. Once the product reaches a retail outlet, the end consumer has to pay a consumption dubbed value added tax.
If the manufacturer imports the raw material from another state, the state government levies tax along with the central excise on the same product. Not only this, if product A is manufactured in one state and sold in another, then, it is considered as ‘export’. In this case, the state when the product is manufactured will collect an export tax called central sales tax.
Hence, India is economically fragmented. The multiple taxes increases the cost and makes economic activities way more complicated. This made the introduction of ‘one nation, one tax’ system inevitable.
GST is a Value Added Tax (VAT) proposed to be a indirect tax. It is levied on manufacture, sale and services at the national level. The GST is aimed at replacing all the indirect taxes levied on goods and services by Indian Central and State government separately.
This is referred to as a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. The multi-stage refers to the multiple steps that a product goes through. Starting from the point where the raw material is bought, the finished product goes to the wholesaler, followed by the retailer and finally reaches the end user.
With the introduction of Goods and Services Tax, there will be 3 kinds of applicable Goods and Services Taxes:
CGST: where the revenue will be collected by the central government
SGST: where the revenue will be collected by the state governments for intra-state sales
IGST: where the revenue will be collected by the central government for inter-state sales
ClearTax explain the meaning of GST and tax structure under the new regime with a simple tabular representation.
|Transaction||New Regime||Old Regime|
|Inter-state Sales||CGST + SGST||VAT + Central Excise/ Service Tax|
|Intra-state Sales||IGST||Central Sales Tax + Excise/ Service Tax|
The journey of GST so far has been described below.
2000: The Vajpayee government proposed the concept of GST by setting up committee to draft the same.
2004: The Kelkar Task Force was created for the implementation of Fiscal Responsibility and Budget Management (FRBM) Act, 2003. The committee suggested a comprehensive GST.
2006: A proposal to introduce a national level GST by April 1, 2010 was mooted in Budget Speech for the year
2007: Empowered Committee of State Finance Ministers started working on GST roadmap. The Joint Working Group submitted its report to EC in the same year
2009: First Discussion Paper was released by Empowered Committee
2011: The constitution 115th amendment bill was introduced in Lok Sabha for levy of GST
2014: The constitution 122nd amendment bill was passed by Lok Sabha. This enabled the introduction of GST by April 2016
2016: The constitution 122nd amendment bill passed by Rajya Sabha
2017: GST council clears state GST and Union Territory GST Laws
Every business that has a turnover of more than Rs. 20 Lakhs have to get mandatorily registered under GST. The taxpayers who are already registered under VAT/Service Tax should register under GST as well. The small businesses can either opt for composition scheme or they can get voluntarily registered under GST. It is anticipated that the threshold limit will be calculated on a pan-India basis. This means that the transaction may be liable to be taxed under GST if the total turnover (of all transactions all over India) exceeds the threshold limit. This is another positive aspect for the eCommerce players as they operate in various states of the nation.
In an online transaction, the eCommerce operator is a mediator between the buyer and the seller. So, the very first question that is raised is that whether VAT is applicable on the commission or is it a service or is it a composite contract?
The much-awaited draft of Model GST Law (the ‘Model Law ’) was released in June 2016. The destination-based consumption taxation as proposed under GST would ensure that all states get their share of revenue on the basis of actual consumption of goods in such state. The sub-section (a) of Section 43B clarifies the definition of aggregator. It says, “Any person who provides services either by an application or communication device which enables a buyer and seller to connect and procure goods or services under any brand / trade name is termed as an aggregator”.
The Model GST law, finalized by the GST council, provides for 1% Tax-collection-at-source (TCS) to be deducted by the eCommerce operators. According to the Model law, every electronic commerce operator shall collect up to 1% TCS, as may be notified on the recommendations of the council, of the net value of taxable supplies made through it by other suppliers where the consideration with respect to such supplies is to be collected by the operator. However, turns out TCS is in direct conflict with the government’s vision of ‘Make in India’ campaign and ‘ease of doing business’. The obligation of tax collection at source is cast in respect of supplies made by the suppliers online. While the suppliers supplying goods and services from a brick and mortar structure are not obligated to any such tax. Thus, this provision would hamper the business than facilitate doing of business.
In July 2016, Sachin Bansal said, “A seamless national supply chain that is agnostic to supply or demand destination is urgent, important and overdue for three reasons. First, it is India’s development trajectory to reduce poverty. Second, it will improve enterprise productivity . Finally, it is about empowering consumers and producers.”
However, as per a article published in The Hindu, with the introduction of TCS clause has there would be a risk of locking up about Rs. 400 crore of capital per annum. This will ultimately result in approximately 2 Lakh people losing their job. The three eCommerce giants: Amazon, Flipkart and Snapdeal has joined hands for the first time to voice concern over this clause.
Having discussed about the basic definition of GST, here’s a compilation of the impact it will have on the online marketplace.
The eCommerce industry is expected to flourish and grow under the new GST era. The standardization that the system promises is expected to have a huge impact on the industry as well as the online marketplace.
In the current regime, the online marketplace charges service tax to the vendor for providing services. However, in the GST system, the eCommerce marketplace would charge CGST + SGST or IGST depending on the nature of the transactions.
Listed below are some of the impacts that this system will have on the online marketplace, in particular.
Effect on Pricing
In the current tax structure, the different state imposes different VAT on the same good. The online players tend to price their goods at discounted prices, in order to promote its business. As a result, they enter tie-ups to take advantage of the tax arbitrage. With GST, there will be a standard tax rate for every product. Making tax arbitrage impossible, it will bring the offline sellers and e-tailers on the same level in term of pricing.
Unregistered online merchants
With GST, all the online sellers will be forced to get themselves registered. GST registration is mandatory where the turnover is Rs. 20 lakh or more. The merchants without proper registration will be weeded out, irrespective of their turn over.
The companies need to have a higher credit pool than they do in the current taxation system. As per quoted by a senior officer of an eCommerce company, “Small sellers in the industry will have cash-flow issues as they will have to claim refunds for tax paid on inputs, which e-tailers will not be able to account for.”
Registration of the Company
The place of supply, in the case of B2C transactions, would be the location of the service provider. While the place of supply in case of B2B transactions would be the location of the service recipient. There are chances that the eCommerce companies would need to pay applicable CGST + SGST in the state where the service recipient is located. As a result of which, these companies would require getting registered in almost all the states where the service recipients (i.e. vendors) are located. The centralized registration system will not be applicable anymore.
Compliance issue on returns and refunds
This is probably the most perplexing issue for the online marketplace. The eCommerce companies offer the facility of COD and easy returns and refunds. As a result of which approximately 15 to 20 million transactions per month in which the return and refunds have to be done. The returns are now required to be filed monthly by both the parties. The refund adjustments will affect the tax liability.
According to experts, the GST impact has two major advantages for the eCommerce players.
No cascading taxes
The GST model facilitates seamless credit throughout the supply chain. Removing the cascading effect of taxes, the GST system will bring down the overall cost of supplies and the price of the finished product ultimately. It is hoped that this cost benefit would be ultimately passed on to the customers or help in increasing the profits of the companies.
Consolidation of the tax rates
In the current system, there are differential rates of VAT for the same goods in different States. However, GST rates at both the Central and State level are expected to be uniform and harmonized. This would drastically reduce disputes among tax authorities and e-commerce players. Moreover, the tax rate on the output side is expected to be higher. All the output taxes will be creditable on the provision of services to the seller. The online marketplace can also claim the credit for all taxes on the input side.
Ease of Doing Business
GST system is a step ahead towards facilitating the initiative of ‘Start-up India’ of Modi Government. The aspiring entrepreneurs wouldn’t have to knock on multiple doors in the various cities. This was one of the biggest barriers in starting up, but with the ‘one tax’ system, India might go a few notches higher in the World Bank’s Ease of Doing Business Index.
A push for warehousing
The logistics and warehousing department of eCommerce companies are expected to be one of the biggest beneficiaries of GST. The eCommerce players had to maintain multiple warehouses across the states and cities to avoid central sales tax. This increased the cost of operations. With the introduction of GST, they can maintain warehouses in strategic locations. This will balance out the operation cost and reduce the dent in their profitability.
GST is a great move for online businesses. Even though the new regime will be accompanied by new ways of tax calculation, it will eventually bring clarity and tax obligation.