The e-commerce sector in India has seen extraordinary growth, due to internet and mobile penetration, leading to an increased online consumer base. The Assocham has predicted that the e-commerce market will accelerate to a whopping $38-billion-mark in 2016, which is a 67% leap from $23 billion achieved last year. Growth of business is always welcome news. But for any business to develop at the desired pace, a country’s tax regime must be transparent and supportive.
Our indirect tax regime caters primarily to conventional transactions involving goods and services, without focus on transactions executed online. The absence of a defined framework on indirect taxation of such transactions has led to inconsistency in practices adopted by e-commerce sector.
E-commerce companies usually operate as marketplaces for facilitation of sale of goods or provision of services, thereby qualifying as pure service providers. Service tax law is constantly evolving, but there has not been much development in the area of e-commerce taxation, thereby leading to multiple interpretations of law and consequent disputes with tax authorities.
In Budget FY16, the aggregator concept was introduced. It led to companies connecting potential customers with service providers through their web portals under their brand names under the service tax net. However, what is the true scope of the introduction is still not clear. As an aftermath of the ambiguity surrounding the scope of this concept, all companies operating through e-commerce platforms have been falling victims to scrutiny by service tax authorities. Qualification of an e-commerce company as an aggregator, and dual payment of service tax as an aggregator and as a service provider on its own revenue have become routine challenges.
Service tax provisions don’t provide clarity on taxation of typical e-commerce transactions like e-wallet, cash-on-delivery, vouchers, cashback, drop-shipment, etc. There is a profusion of ambiguity in service tax treatment of amounts like cancellation fees, delivery fees, etc, charged from customers. Also, such companies are seemingly oblivious to the requirement of issuing invoices in legally-specified formats.
Lack of clarity coupled with ignorance of law leads these companies to be scrutinised and questioned by authorities for non-payment and non-compliance. The government has to address concerns surrounding the sector and issue necessary clarifications. A positive step could be issuing answers to FAQs specific to the e-commerce industry.
Recently, the Start-up India campaign was launched and one of the benefits announced is income tax exemption for the first three years of the business. Most start-ups today venture into e-commerce industry. Therefore, commendable as the government’s objective may be, there is an urgent need for the initiative to introduce similar reforms and measures in the area of indirect tax as well. For Make-in-India, complete exemption from service tax on e-commerce transaction will be welcome in the upcoming Budget.
In addition to simplifying the taxation structure, implementation of the GST regime will help eliminate most indirect tax issues and boost the e-commerce sector. We have to provide the sector with a conducive environment to thrive in. While the e-commerce sector is hopeful of positive reforms in indirect tax, the GST, which was expected to be implemented from April 2016, could hold the key to eradicate most issues faced by the e-commerce industry.
(Assisted by Rishika Arya, manager, and Somya Gupta, associate)
The author is partner, Indirect Taxes, PwC