E-commerce in India:
E-commerce in India is growing a scorching pace in excess of 30% CAGR and is expected to reach a size of 2 lakh crore by end of 2016 and 6 Lakh crore by 2020. E-commerce is a case in point where existing Indian indirect taxation laws have struggled to keep pace with new innovative business models resulting in ambiguity and ad hoc measures. A typical E-commerce business can be broadly classified into 2 broad buckets as below:
Market place model: An asset light model wherein the e-commerce firm merely acts as a platform and connects buyers and sellers and does not own any inventory. 100% FDI (Foreign Direct Investment) is allowed.
Ex: Amazon, Flipkart, Snapdeal, eBay etc.
Inventory based Model: The e-commerce firm owns the inventory of goods and services and sells to the consumers directly. No FDI allowed.
Ex: Bigbasket, Jabong
Today e-commerce in India is mired in a host of taxes: VAT / CST / Service Tax / TDS with more than one tax applicable on any given transaction. Involvement of logistics / reverse logistics, advertising & promotion services, goods like software, music, e-books etc. makes it hard to differentiate Goods & Services component of each transaction. Also, grey areas have emerged due to e-commerce players who have adopted marketplace model are having own warehouses to store the inventory. Although there is visible value addition by e-commerce players no VAT is being paid by them. This has resulted in many disputes with state commercial tax departments. Karnataka has been insisting on these warehouses to be registered under VAT and e-commerce players be considered as consignment agents and be made to pay VAT. Several states (Ex: Delhi, Rajasthan) have insisted on separate disclosures by dealers of online transactions due to concerns of such sales getting under-reported. Uttar Pradesh has imposed several restrictions (declaration form) on interstate purchase of goods worth more than Rs 5,000 through e-commerce. States like Uttarakhand, Bihar, West Bengal, Himachal Pradesh and Uttar Pradesh have levied entry tax ranging from 5 to 10% on goods purchased interstate through e-commerce platforms.
E-Commerce in GST:
Many e-commerce firms have welcomed GST since for the first time there is a legal framework that defines ‘electronic commerce’ and‘electronic commerce operator’. Although the draft model law is far from being comprehensive, it is expected to evolve and attain maturity.
Business Process Impact:
Outward Supply: With GST, uniformity in compliance across India is ensured, thus e-commerce sellers can look for markets beyond state boundaries without the hassles associated with complying to state specific rules (Ex: Declaration Forms, Way Bills) and taxes (Ex: Entry Tax).
Compliance: All sellers on e-commerce platforms will have to obtain GST registration irrespective of turnover meaning increased compliance vis-à-vis offline sellers. Fulfillment centre of e-commerce to be registered as additional place of business by sellers and stock transfer will be treated as taxable supply leading to cash flow issues. Both the vendor and e-commerce operator will have to report supplies and will be cross-matched. Any supply reported by operator but not by vendor will be added to the liability of the vendor.
Tax Invoice: Tax invoices need to be physically or digitally signed (digital signature ink).
Schemes and Discounts: All discounts will have to be explicitly mentioned in invoice and post supply discounts by market place to a seller (promotions) will have to be more explicit and be agreed in advance. As Freebies will also be taxable, sellers will need to tweak their offerings.
Logistics: With e-commerce operators expected to collect a portion of GST and pay to the government on behalf of the seller (Tax Collected at source at 2%) there is a new paradigm getting established. The TCS deducted on aggregate sales for the month (sales less sales return) will be credited to electronic cash ledger of seller. E-commerce players providing their own logistics services will be able to quickly adopt to this new reality as cash flow happens through their network. With nearly two third sales happening through CoD (Cash on Delivery) model, if a third party logistics provider is involved, the cash flows have to be now tweaked to flow back to the e-commerce operator to enable deduction of tax. Alternatively, the tax amount of CoD orders has to be now deducted from pre-paid sales.
With many e-commerce firms following weekly settlement for sellers, the TCS needs to be deducted in such invoices and filed by e-commerce operator in their GSTR-1.
(Note: This is not to be confused with 10% income tax TDS (on commission) which sellers are supposed to deduct while paying commission to e-commerce operator. This in practice is currently deducted by operator and paid to income tax department on behalf of seller.)
Reverse Logistics: With high prevalence of goods returns (15-20%) and cancellations, reverse logistics also needs to be more robust. Raising of credit note is not a very prevalent practice currently, but will have to be adopted for accurate depiction of tax liability.
High volume of transactions (200 to 300 per day), thin margins, and increased compliance (upload & matching, advance tax) mean, only adoption of a robust IT solution can guarantee smooth business operations.
Depiction of Process Flow:
Below diagram illustrates the flow of orders and funds in the GST era:
Fulfillment of Cash on Delivery order by an e-commerce seller through a 3PL provider is illustrated. In this case fulfillment is by seller and not the marketplace.
Order and Goods Flow:
Let us assess the impact using an example as below:
M/S SLV Traders deals in Metallic Sports Water Bottles. He purchases them directly from manufacturer and sells on e-commerce platforms through the fulfillment model.
Assumptions: For the sake of this illustration, it is assumed that the products are charged at 5% VAT, and goods charged at lower VAT rate are likely to be charged at lower rate of GST as well (12%). For the sake of comparison the purchase and sale price are kept same in both tax regimes.
Current Tax Regime:
· Despite similar purchase and sale price in both VAT and GST regime, the profitability is much higher in GST. This is mainly due to a number of taxes (Central Excise and Service Tax) that formed costs in VAT regime will be available as inputs in GST regime.
· In the above illustration although the GST rate at 12% is much higher than VAT rate of 5%, the net tax payable in GST regime is lower by 9% due to elimination of cascading effect.
· In the medium to long term due to competition the profit margin levels may come down to pre-GST levels and thus the benefits of lower cost and lower tax payable will be passed onto end customer.
The earlier draft model law talked principally of two categories of online players, i.e market places and aggregators of services under their brand name (Ex: Ola/Uber/IRCTC/Makemytrip etc.). However, many e-commerce players act as both aggregator and marketplace. Other prevalent e-commerce formats like aggregators of ‘goods’ under their brand (Ex: Quikr/CarTrade/Olx etc.) are not clearly defined. Many e-commerce firms only act as a meeting place for buyers and sellers and are not themselves involved in financial transaction (Ex: B2B players like Alibaba and eBay) and hence collection of tax at source cannot be applied. A host of job portals (Ex: Naukri.com, Timesjobs), matrimonial websites (Ex: Shaadi.com, Jeevansaathi.com), restaurant booking (Ex: Zomato), food delivery (Ex: Swiggy), adventure/vacation booking sites (Ex: Thrillophilia), hyperlocal delivery (Ex: Grofers, Amazon Now, Zopnow), cab rentals (Ex: Zoomcar, Myles), digital wallets (Ex: Paytm), music download, mobile advertising (Ex: InMobi) have innovative business models which cannot be classified as a pure play marketplace or aggregator. Hence further redefining of Model draft law is needed.
The revised draft GST law however has removed the definition of aggregators and these might get covered under draft rules.
In conclusion, the benefits of GST resulting from uniformity in processes across the country, elimination of cascading effect, boost to economy, legal standing for e-commerce will far outweigh the glitches pertaining to increased compliance burden. E-commerce platforms and sellers will have to make the necessary changes to their IT infrastructure to accommodate for ‘destination-based-consumption’regime and to meet new accounting requirements pertaining to Tax deduction at source. E-commerce sellers will be required to be mandatorily registered under GST irrespective of turnover. Outward supply reported by sellers (GSTR-1) will be compared with report of sales by e-commerce operator (GSTR-8) and any under reporting will be penalized adding to compliance burden. With many e-commerce unicorns (valuation in excess of 1 Billion US $) emerging in India (Flipkart, Ola, InMobi, Paytm, Shopclues, Zomato) GST law needs to encourage such business growth while not compromising on reasonable tax demands.