The e-commerce industry is undergoing a period of substantial change and governmental scrutiny. If the Press Note No 3 of 2016 issued by the Department of Industrial Policy & Promotion was any authoritative indicator that the government has realised the glaring regulatory gaps in the e-commerce sector, the Model GST Act has gone a step further to put the spotlight on streamlining indirect tax levy on e-commerce companies.
The Model GST Act has dedicated an entire chapter (Chapter XIB) to ‘electronic commerce’ which details the various definitions and manner of collection of tax. ‘Electronic commerce’ has been defined under the Model GST Act as the supply or receipt of goods and/or services or transmitting of funds or data over electronic network by using any of the applications that rely on the internet, irrespective of whether the payment is conducted online and whether the ultimate delivery of goods and/or services is undertaken by the operator.
‘Electronic commerce operator’ is defined as any person who directly or indirectly owns, operates or manages an electronic platform that is engaged in facilitating the supply of any goods and/or services or in providing any information or any other services incidental to or in connection therewith. It does not include persons engaged in supply of such goods and/or services on their behalf. Interestingly, ‘aggregator’ has been defined separately to mean a person who owns and manages an electronic platform to enable a customer to connect with persons providing a service under the brand name of the aggregator. There seems to be some overlap between the definition of an aggregator and an e-commerce operator. However, in accordance with the wording of these definitions, the ‘aggregator’ pertains only to e-commerce platforms offering services under their brand name. Both e-commerce operators as well as aggregators are required to register as ‘taxable persons’ under the Model GST Act and discharge tax liability.
The definitions themselves pose a few issues, as while there is a thin line between the meanings ascribed to the two terms, the compliance requirement for each is different. Some e-commerce companies such as taxi aggregators may qualify as ‘aggregator’, but will be saddled with tax liabilities as they facilitate payments through the e-commerce platform. Further, certain companies which publish online classifieds for jobs, goods and services would fall outside the ambit of both terms, thereby leading to ambiguity in their tax liabilities. The evolving nature of e-commerce transactions is bound to create challenges in laying down precise definitions. But the current set of definitions are riddled with uncertainties which can pose major hurdles in business planning for growing organisations.
The Model GST Act, under Section 43C, unequivocally establishes a method of tax collection at source which provides that all e-commerce transactions will attract GST and that the tax will be collected by the service operator as soon as the supplier receives payment. This method of tax collection at source has caused considerable worry to e-commerce companies due to several reasons.
The primary concern is regarding massive compliance requirements aimed at plugging any tax leakage. Essentially, e-commerce operators would be required to deduct a certain percentage of the amount paid to the supplier by the consumer for goods and/or services purchased by the consumer through the e-commerce platform. Details of such tax deducted for each month and for each supplier would be required to be furnished by e-commerce operators. This would be a mammoth task for certain e-commerce companies which have thousands of suppliers operating through their platform. The task of matching supply-related data of e-commerce companies with that of the supplier would add an additional layer of complexity and could potentially lead to litigation between the two in case of a mismatch.
Like any other provision related to tax collection at source, the collection is made in advance and, therefore, the supplier would be entitled to claim the credit of tax collection at source and adjust this against his final tax liability.
However, small business owners, who usually operate with thin margins, may face certain working capital issues due to this revised tax collection and refund system, discouraging them from operating through these platforms. In the past decade, e-commerce companies have been instrumental in developing a national network for sale of consumer goods and providing reach and visibility to small and medium enterprises, which would have otherwise not been possible. In order to allay fears that these businesses may have regarding refund and credit, an efficient mechanism for dispersion is required.
The burden of tax collection at source also creates disparity between the sale of goods through an e-commerce operator who sells products under his own brand name and the one who sells several brands through an e-commerce platform. Those e-commerce companies that supply their own goods and/or services to consumers are exempt from this requirement of tax collection at source. Needless to say, this places certain e-commerce companies at a significant disadvantage in comparison to not only those e-commerce companies supplying goods/services through their own platforms, but also the suppliers who operate brick-and-mortar stores.
The Model GST Act grants power to tax authorities to require e-commerce operators to furnish details regarding stock of goods held by suppliers in the warehouses of the said operators. Under the current indirect tax regime, in order to mitigate certain VAT and entry tax burdens, e-commerce companies have established warehouses in individual states. However, to avoid unnecessary tax hassles, e-commerce companies may discontinue operating under this model. In any case, under the Model GST Act, branch transfers are subject to GST, and even with a provision for refund, it may be too cumbersome to stock and supply goods through warehouses.
The provisions of Model GST Act do not provide enough clarity on cash-on-delivery transactions, sales returns and valuation of goods/services in case of discounts.
The Constitutional Amendment Bill was passed by the Lok Sabha in May 2015 and is awaiting Rajya Sabha’s approval. It is likely that the Bill will pass in the ongoing monsoon session. The Model GST Act indicates that the e-commerce sector will be rid of the ambiguities currently associated with the indirect tax levy. While the introduction of GST will place a significant compliance burden on e-commerce companies, a streamlined manner of registration and credit utilisation is expected to relieve some anticipated stress. The government has realised that the e-commerce sector is not akin to any other industry and a nuanced approach is required to tackle its unique issues. In order to do so, the Model GST law may be required to undergo amendment or judicial interpretation to ensure effective implementation on e-commerce transactions without hindering the growth of the industry.
The author is NLIU, Bhopal, alumnus and an indirect tax lawyer. Views are personal