Significant strides in technology have led to a gradual shift in the manner in which goods/services are marketed and sold by various players to the end-consumers. E-commerce is one sunrise sector which has tapped this technology and has gained considerable space in the last few years.
In India, like in the European Union (EU), digital economy is growing at a rapid pace. According to an estimate, 53% of over 380 million internet users within the EU area buy products and services online. The e-commerce sector has, of late, been attracting lot of investments by the private equity players.
The act of purchasing online is comparable to “normal” trade in that the sellers offer their products on the internet and the customers choose according to their preferences. Then, by making a selection on the monitor, the customers express their wish to purchase the selected items. As part of the process, consumers choose a method of payment from those offered—credit card, cash on delivery, debit card and other comparable methods.
For such trades, there are generally two operational models: one wherein the e-commerce player owns the goods and sells the same to the end-consumer; the other model is wherein the e-commerce player provides a marketplace to the other sellers to display and sell the goods directly to the end-consumers on the web portal, in exchange for a commission on sales.
Another differentiation that is immensely important from a GST perspective would be between physical supplies of goods (tangible goods) and supply of digital goods/services (digital goods). Taxation of e-commerce transactions continues to be a controversial issue globally with its own set of challenges.
If one were to consider the example of the EU, the bloc has a comprehensive value added tax (VAT) system in place to tax such transactions since 2006. The Sixth Directive defines a taxable transaction within the EU VAT scheme as a transaction involving supply of goods, supply of services and importation of goods.
Although VAT was introduced in the EU long ago, it is still struggling to cope up with the ever-changing business scenarios such as e-commerce.
With effect from January 1, 2015, new rules for calculation of VAT on broadcasting, telecommunications and e-services would come into effect across the EU. These changes are referred to as VAT on Electronic Services (VOES) and, in principle, VOES supplied to consumers will no longer be calculated based on the place the service was supplied from but rather on the place in which it is now consumed. The fact that even under the proposed new rules there are various challenges and issues around the operational mechanism is a pointer to the intrinsic difficulties in taxation of the e-commerce sector, especially around supply of digital goods and services.
The e-commerce sector in India has, of late, been facing challenges on the State VAT front with some notices being issued by Karnataka VAT authorities to one of the leading players. The impending issue(s) stem from the fact that India does not have any specific laws to regulate the e-commerce sector and the various tax laws do not have any enabling provisions to cater to the complex and rapidly evolving e-commerce space.
The proposed implementation of Dual GST could be a big boost for e-commerce sector which may not only alleviate the existing challenges but also bring about significant efficiencies to the e-commerce sector, giving them a much more competitive advantage vis-a-vis the brick-and-mortar stores. The pertinent point that needs to be kept in mind while drafting the law for e-commerce is that tax rules should not make a distinction between the real and the digital economy. This is necessary in order to ensure that goods sold online suffer the same tax treatment as the goods that are sold in brick-and-mortar stores.
One of the most important pillars for the Dual GST structure would be the rules determining the place of supply of goods/services. To ensure a coherent Dual GST mechanism involving both the Centre and the states, adoption of same place of supply rules for goods/services would be a prerequisite. It is expected that the Centre would be framing the place of supply rules for goods/services in due discussions with the states and common rules would find place under the Central GST, Integrated GST and the various State GST laws.
With regard to supply of tangible goods, the determination of place of supply of goods would be relatively easy depending on the movement and the destination of the goods. Having said so, one of the principal issues would be the rules for place of supply of services by the e-commerce players to the vendors under the marketplace model.
The much larger challenge under GST would be taxation of supplies of digital goods and services (goods supplied over the internet such as digital books, music, etc) by the e-commerce players. Considering the meteoric rise of the e-commerce sector and the revenue potential involved for the government, the Indian revenue authorities would expectedly come up with specific rules governing supplies of digital goods/services by the e-commerce sector based on global best practices.
On a global basis, the implementation of GST would reduce tax costs in the overall supply chain and provide tax advantage to the players in e-commerce space. On the business front, implementation of GST would provide a lot of flexibility to the e-commerce players to structure their supply chains on business considerations and achieve further efficiencies in business operations.
By Prashant Raizada
The author is indirect tax partner with BDO India