Today, eCommerce companies in India are mired in a plethora of taxes, including VAT, CST, Excise, Service Tax, and TDS, with multiple taxes applicable on any given transaction. The complexities of logistics and reverse logistics, advertising and promotion services, software products, music, and eBooks makes it even harder to differentiate between goods and services in each transaction. To make matters worse, statutory forms and e-way bills add complexity to interstate transactions. Sellers must also comply with registration requirements and declare their turnover to tax departments of multiple states. Under the upcoming Goods and Services Tax (GST) law, India will become a unified common market with reduced compliance costs, and eCommerce business will notice major changes.
Change for Ecommerce under GST
Because interstate transactions are tax neutral compared to local sales under GST, the warehousing strategy of eCommerce companies will need need re-engineering to meet client proximity needs, rather than prioritizing tax considerations. On the positive side, pricing of products and profitability will be more predictable, regardless of where the customer lives.
Ecommerce companies that buy stock, store inventory and sell will have to pay a 17-18% GST now (instead of a 12.5% excise tax), thus driving up prices. They will also be taxed on unsold inventory held in warehouses.
Several ecommerce transaction types are currently undefined in tax laws and will have more explicit requirements for compliance, such as e-wallets, gift vouchers, and advance receipts. The model draft GST law answers many longstanding questions and provides clarity on valuation, definition of services (all intangibles) and goods, place of supply, and point of taxation. The model draft law also defines terms such as ‘electronic commerce,’ ‘aggregator,’ ‘electronic commerce operator,’ and so on. However, it also adds to complexity, and the law will still leave some loose ends.
GST challenges for eCommerce companies
Sellers or suppliers on e-commerce platforms are obligated to register under GST regardless of how much they sell. This could be unfair to some small eCommerce retailers, as the same rule does not apply to offline sellers who sell any amount below the threshold of 5 Lakhs for the North Eastern states and 10 lakhs for the rest of India.
Ecommerce companies like Amazon and Flipkart operate under the marketplace or drop shipping model: they store goods from sellers at their warehouse, then 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 places of business, respectively. This could prove challenging as these warehouses often lack physical segregation between the goods of different sellers.
The treatment of stock transfer from seller to the warehouse under GST would be different as any ‘supply’ is taxable. This might lead to cascading of taxes as typically sellers do not ‘sell’ stock to e-commerce companies.
Currently, registration of marketplace warehouses as additional places of business is disallowed in some states. Under GST, this may change. Marketplaces will also be required to register in each state and union territory.
Place of Supply
Determining where goods are supplied from is easy to do, but where do services come from? Ecommerce firms may have some difficulty making this determination, particularly large vendors like Shoppers Stop, which supply from multiple states.
Tax Deduction at Source (TDS)
Under the prevailing tax laws, sellers on eCommerce platforms are required to deduct Tax at Source (TDS) on the commission they pay to the platform. They have to deposit TDS, obtain Form 16, submit to the ecommerce merchant, and obtain a refund. Under GST, the entire process has changed. The marketplace deducts its commission, as well as TDS, and files a TDS return. The TDS deducted will appear automatically as a credit in the seller’s electronic credit ledger, which he can use to discharge his tax liability. The impact is more significant when a customer returns a product and the deducted TDS has to be reversed.
In each transaction, e-commerce merchants and sellers will have to upload invoice details in their respective returns and the GST system will match them. Any supply reported by the platform and not reported by the marketplace, unless reconciled, will be added to the liability of the seller, which will penalize the seller.
In addition to changes stemming from a sudden increase in compliance needs for both sellers and eCommerce platforms, new rules also impact cash flows of small sellers due to TDS.
If an eCommerce platform wrongfully reports a transaction against a seller, unless reconciled, it is considered as supply by seller. Platforms will have to develop mechanisms for all cash flow from their platform to seller, such that TDS can be effected.
In case of direct shipping by sellers to the end customer, the cash-on-delivery mechanism will require a major revamp.
For Service Aggregators like Uber and AirBnB, compliance and tax payment complexities are due to the dual nature of participants — drivers and passengers. This potentially complicated transaction requires aggregators to comply with TDS as well as actual sales transactions.
More clarity is required for other e-commerce verticals, such as ticketing and tourism, adventure or events, hotels or resort bookings, B2B players, and other similar industries, wherein sellers supply services to end customers, but do not necessarily involve cash flow via the platform.
Marketplaces will have to make several changes to their ERPs to handle the new requirements emerging due to GST.
Each order or invoice will now need to include a Harmonized System of Nomenclature (HSN) or Service Accounting Code (SAC) code as well. Place of Supply should be determined based on GSTIN for B2B transactions and delivery address for B2C sales. ERPs will need to be tweaked to deduct and account for TDS and reverse all charges appropriately when buyers return goods. Return filing will be a huge process, due to reporting invoice level sales, debit notes, and tracking mismatches, among other complexities.
The GST Act is a welcome move toward legal recognition of the ecommerce model in India, but further modifications will be required to avoid problems in execution. The sooner these issues are settled, the smoother the GST rollout will be.
To learn more about how Avalara can help you with GST automation, contact us through https://www.avalara.com/in/contact-us/