State chief ministers clearing the way for the rollout of Goods and Services Tax from 1 April 2017 may be a major boost for the country's e-commerce sector but also opens up a few major challenges.
The model draft GST law, released by the finance ministry on Tuesday, has brought electronic commerce under its purview. It is to be noted that the development has come at a time when the sector is going through a rough patch due to dwindling funds and mounting losses.
The GST regime will essentially tax the goods and services and all online purchases at the first point of transaction, as the per model draft. The reform is aimed at subsuming all indirect taxes to create one national market.
Bringing e-commerce under the GST regime will resolve the big tax issues that these companies face in various states now.
States like Uttarakhand, Assam and Bihar recently imposed a 10 percent entry tax on the goods sold online. There were fears that more states are likely to follow in their footsteps. However, Flipkart and other e-commerce companies had alleged that the move to impose tax was not driven by clean hands and was a handiwork of the offline retailers.
The GST regime is likely to end such arbitrary moves by state governments.
In an earlier article of the sector's tax troubles, Vivek Pachisia, Partner - Tax & Regulatory Services at Ernst & Young India, had pointed out that for the e-commerce sector, the indirect tax laws in India have been more of a snag than a driver for growth.
With e-commerce experimenting with various models, the companies have been grappling with a more complex tax framework involving VAT / CST, excise, and / or service taxes.
The sector was also having a hard time categorising their offerings into 'goods' or 'services' for charging either value added tax (VAT) / Central Sales Tax (CST) or service tax, the article pointed out. In case of digital downloads involving software, music, e-books etc, the confusion over whether the transaction is for sale of goods attracting VAT / CST or a provision of service that should be charged to service tax has led to many litigations.
Then there is the big hurdle of moving goods from one state to another, which is evident from the entry tax-related problems discussed above.
But the GST will be a step forward in resolving these issues.
The model GSt law clearly defines ‘electronic commerce’. ‘Electronic commerce’ shall mean the supply or receipt of goods and / or services, or transmitting of funds or data, over an electronic network, primarily the internet, by using any of the applications that rely on the internet, like but not limited to e-mail, instant messaging, shopping carts, Web services, Universal Description, Discovery and Integration (UDDI), File Transfer Protocol (FTP), and Electronic Data Interchange (EDI), whether or not the payment is conducted online and whether or not the ultimate delivery of the goods and/or services is done by the operator.
An ‘electronic commerce operator’ shall include every 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 there with but shall not include persons engaged in supply of such goods and/or services on their own behalf, the law says.
However, some experts have expressed concerns that the clauses in the model draft may add burden to e-commerce companies.
For Pratik P Jain, Leader - Indirect Tax, PwC India, tax collection at source (TCS) system proposed for e-commerce companies is one of the highlights of the law.
"Any payment made to supplier would be subject to TCS at the notified rate. This will mean significant compliance burden on E commerce companies as many of them deal with thousands of vendors. Further, this may lead to refund situation for many suppliers who operate on thin margin. In addition, the E Commerce companies will need to file a statement providing details of all supplies made through E commerce platform," he says.
He, however, feels the revised draft is a significant improvement over the first draft.
Lauding the the hard work done to get all the states on board, he said industry would need to analyse the law with specific reference to their business and set the ball rolling in terms of preparation.
"Hectic times ahead for industry," he said.