India has witnessed significant growth in internet and smartphone penetration in recent times. This, coupled with an increase in incomes, has resulted in a boom for the e-commerce industry. The overall e-commerce market is expected to reach $350 billion by 2030 and is expected to grow by over 20% in 2022.
India is one of the large
internet markets in the world with almost full-scale penetration where close to 100% of pin code areas in India have embraced e-commerce adoption. More than 60% of transactions and orders in India come from Tier II cities and smaller towns. The diversification and growth of the industry requires the review of tax laws to examine whether the laws are in line with the current industry requirements.
There have been persistent efforts from policymakers to introduce amendments to tackle new-age e-commerce transactions. However, the pace of evolution in this industry has been exponential and requires commensurate updates in policies to comprehensively address different business models and transactions. This article attempts to highlight certain areas that need clarity.
Also read: US population is expected to cross 334 million, over 1.5 million people added: US Census Bureau
Carry-forward of losses in case of business restructuring
E-commerce businesses, especially those in their early stages, undergo rounds of fund-raising exercises and business restructuring for strategic reasons, or even to sustain. Tax laws, as they stand today, entail restrictions on availing set-off of past years’ losses in case of restructuring. For instance, in case of a merger, accumulated losses of the merging entity can be carried to the new entity only if the merging entity is engaged in specified businesses. This benefit is not extended to all businesses alike (such as service or e-commerce businesses).
Apart from the above, brought-forward losses of a closely-held company are not allowed to be carried forward and set-off if there is a change of beneficial shareholding of more than 49%. Illustratively, there could be instances of intra-group re-organisation within e-commerce groups with a view to pool funds and other resources. In such cases, if the business group were to incur losses, it may result in hardship without support. Given the peculiar nature of this industry, these restrictions on carry-forward need review to ensure these do not hinder business operations.
Lack of clarity in tax laws
This results in interpretational issues, especially where there are several parties to a transaction. In 2020, India’s domestic tax laws were amended to levy withholding tax on gross sale of goods or services facilitated by an e-commerce operator on an e-commerce platform. This amendment contemplated a minimum of three parties to a transaction—a buyer, a seller and an e-commerce operator.
Since the introduction, there has been ambiguity around what constitutes goods and services, as none of these terms are defined exhaustively. In a traditional brick&mortar economy, goods can be understood, in common parlance, to include all property. However, in an industry with vouchers, loyalty programme points, and the likes, the characterisation of such items as goods becomes a challenge.
Also read: Looking back at competition law in 2022
The other issue is around the scope of the term ‘facilitation’ of sale of goods or provision of service. Facilitation means to make an action or a process possible or easier. The question that arises is what level of involvement of a platform tantamounts to facilitation—is it advertising a product, listing a product, supporting execution of a contract, or even more? Where there are two e-commerce platforms facilitating a transaction—say one listing a product and the other facilitating a payment—which of the two should comply with tax laws applicable to an e-commerce operator?
Multiplicity of levies leading to cascading effect of taxes
A sale transaction facilitated on an e-commerce platform is subjected to withholding tax at the rate of 1% under the direct tax laws. To take a step back, these products would also have been to subjected to withholding tax levy at the time they were bought by the retailer. Further, e-commerce aggregators are responsible for collecting and depositing taxes at the rate of 1% in respect of taxable supplies made through them under the GST law.
To take a holistic view of the supply chain, an e-commerce transaction is subjected to tax levy at multiple stages in the hands of different parties. While this facilitates tracking of the transaction, a more rationalised mechanism (a single point of levy in the hands of one party to a transaction) could ease out working capital management for e-commerce businesses.
Rapidly evolving businesses and transactions are always a challenge for policy makers. While clarity has been brought out in many areas, constant review of the areas is critical.
The writer is Partner, Deloitte India
Views are personal
Co-authored with Sanjana Dawar, manager, Deloitte Haskins & Sells LLP