TCS under GST

India’s eCommerce industry has grown by such leaps and bounds that the country is poised to become the world’s second largest eCommerce market.

The Indian government has, however, found it difficult to keep pace with industry dynamics. Despite relaxing federal direct investment (FDI) policies, implementing an eCommerce tax, and introducing Goods and Services Tax (GST), growing pains still exist. One of which is supposed tax evasion by online B2C sellers, who are not subject to Input Tax Credits (ITC).

With the mammoth number of sellers on every eCommerce platform (Snapdeal has close to 5 lakhs) and with most transactions being interstate sales, it is very difficult for the government to keep track of the tax collected and paid. The solution? Tax Collected at Source (TCS), introduced in November 2016 as Section 56 of the draft Model GST Law (MGL).

What is TCS and how does it work?

TCS affects electronic commerce and electronic commerce operators, which MGL defines as:

  • Electronic commerce: sales of goods and/or services, including digital products over a digital or electronic network.
  • Electronic commerce operator: any person who owns, operates, or manages a digital or electronic facility or platform for electronic commerce.

As per Section 56, every electronic commerce operator must collect (i.e. deduct) tax at source @ 1% on the net taxable value of a vendor’s sale before making payment to that vendor. For instance, when an online vendor sells a product worth Rs. 1,000/- through Flipkart, Flipkart must collect Rs. 1,000/- from the customer, deduct TCS of Rs. 10/- (1%), and pay Rs. 990/- to the vendor.

Thereafter Flipkart must remit the TCS to the government and upload a statement detailing all the outward sales through its platform and the TCS collected within 10 days of the subsequent month.

Vendors can claim credit for the TCS deductions based on the statement Flipkart files.

Four Impacts of TCS

For better or worse, TCS is expected to:

  1. Curtail tax evasion: TCS enables the government to collect tax and information at the source, which will act as a check on vendor tax evasion.
  1. Hinder vendors’ cash flow: This is one of the biggest worries for online vendors, especially considering the already thin profit margins when selling goods. Handling returns, which are estimated to occur on 15 to 20 percent of ecommerce sales, will further compress cash flow.
  2. Be burdensome for vendors: If there’s a mismatch between the information the ecommerce operator files and the information the vendor files, the entire tax burden will fall to the vendor, no matter where the fault lies.
  3. Create additional burden for ecommerce operators: Platform updates will be needed to handle monthly TCS filings, as well as to address purchasers’ ITC claims, given that under GST there are no restrictions on claiming ITC.

What’s still unclear is how TCS will impact:

  • Sales of exempt goods
  • Cash on delivery (COD) sales
  • C2C transaction (Olx, Quickr, etc.)
  • Service aggregators (Uber, Ola, etc.)

Reaction to TCS

Ecommerce operators haven’t exactly welcomed TCS with open arms. At an FICCI press conference in February, online retailers Flipkart, Snapdeal, and Amazon voiced their concerns, saying the new measure could result in a capital lock-down of about Rs. 400 crore for sellers and discourage them from selling online.

While Snapdeal co-founder and CEO Kunal Bahl affirmed that, “ecommerce is vociferously for GST,” he also said that TCS, “goes against the spirit of making India digital and improving the ease of doing business in the country.”

Amazon India Head Amit Agarwal agreed that TCS could very well, “negatively impact the growth of marketplaces at a stage when the industry is still in its infancy.” Agarwal further urged the government to re-evaluate what he called an “onerous requirement.”

Conclusion

GST being a one-nation tax and a destination-based tax, it will surely soothe many of the problems the ecommerce industry faces today, especially in terms of logistics and tax compliance. However, considering the reactions of the country’s major eCommerce players, the government may want to consider making the law more industry friendly to help sustain eCommerce growth.

To learn more about how Avalara can help you with GST compliance, contact us through https://www.avalara.com/in/products/gst-returns-filing