E-Commerce under the Model GST Law

On 14th June, 2016, the ‘Model GST Law’ was released by the Empowered Committee of State Finance Ministers in a bid to give a notion of finality to the much-anticipated taxation regime. Since then, The Constitution (122nd Amendment) (GST) Bill, 2014 has been successfully passed in both Houses of the Parliament. Given the growing regulations and tighter norms on the e-commerce industry, the GST is expected to bring some respite from problems arising due to the federal structure of indirect taxation in the country.

Currently, over 17 state and federal levies operate together in a chaotic manner. Uttar Pradesh, for example, recently imposed a 5% entry tax on e-commerce purchases made by consumers in the state. Unsurprisingly, U.P. is neither alone, nor the first, to impose a tax of this nature: Uttarakhand, Bihar, West Bengal and Himachal Pradesh have all previously imposed taxes on products sold over e-commerce operators. This levy - the special entry tax, is in addition to the normal levy of indirect taxes - excise, customs, sales (CST/VAT) and service taxes.

In addition, there has been a tussle over states to doubly levy tax on the same transaction by implementing both origin-based and destination-based taxes. The Model GST Law, once operational from 1st April, 2017, will addresses e-commerce in its text, and will reverse the introduction of such taxes. The oft-repeated need for rationalization of indirect taxes will become a reality when the GST subsumes these taxes and nullifies the cascading effect of multiple taxes or levies. The GST also operates as a destination-based tax and will remedy the problems faced by taxation of the same transaction by different states.

Definitions

Chapter XIB of the Model Law (titled ‘Electronic Commerce’) lists definitions of terms in relation in the e-commerce industry. In variance with Press Note No. 3 of 2016 issued by the DIPP on FDI in E-Commerce, the GST does not expressly classify e-commerce entities into inventory and marketplace based models. The proposed definition for ‘electronic commerce operator’ (a terminological change from ‘e-commerce entity’ as used in the DIPP Press Note), in essence, incorporates both models. However, it also states that suppliers undertaking supply of goods or services on their own behalf are excluded from the provisions under this Chapter. Thus, this Chapter does not envisage a binding effect over this category of suppliers. Marketplace models, inventory-based models and aggregators operating on behalf of third parties are within the domain of e-commerce operators. As a result, while Swiggy will be within the ambit of this Chapter, individual food suppliers undertaking orders are expected to be excluded.

The Model GST Law’s definition of e-commerce is also seemingly wider in ambit to the definition in the DIPP - while the latter merely states that e-commerce means the buying and selling of goods/services, the former additionally incorporates transmitting of funds or data over an electronic data. The consequence is that for purposes of taxation treatment, there will be no ambiguity over the inclusion of entities such as Paytm and FreeCharge whose operations are based on payment settlement through an electronic network.

Method of Taxation

Section 43-C of the Model Law provides for the mechanism to collect and remit amounts payable as taxes. It places responsibility on e-commerce operators to collect an amount (at the rate predetermined by the GST Council) out of the amount payable to the supplier of the goods/services by the customer. This collection is done at the time of credit of any amount to the account of the supplier, or at the time of payment of the amount in cash or any other mode, whichever is earlier. This amount that is collected is then remitted as payment to the appropriate government within 10 days after the end of the month in which the collection was made.

The collection of tax at source (TCS) is also expected to make things harder for small businesses that conventionally operate under razor-thin profit margins. As the operator is expected to deduct the tax amount from the money paid to the supplier, the amount that the supplier receives may fall short. Although the supplier will be entitled to the refund at a later stage, it only spells greater working costs in maintaining compliances.

Other Compliances

The sore point for the e-commerce operators remains the extensive procedural/regulatory compliances that need to be fulfilled under the Model GST Law. The compliances - involving TCS and filing monthly statements including details of total amount collected on behalf of each supplier are in addition to the requirement that the operator must furnish details of all such supplies, i.e., every transaction that was facilitated by the e-commerce operator during a calendar month. In effect, where there are significantly large supplier of goods for an e-commerce operator (like WS Retail for Flipkart), this compliance would warrant details of lakhs of transactions. The same responsibility is also mirrored on the supplier, and the details furnished by the operator and the supplier are compared for discrepancies.

Conclusion

The GST has been welcomed as a harbinger of better times for an industry that is managing to stay afloat of regulatory hassles and litigation with significant difficulty. While the compliances under the GST may seem extensive, industry experts remain positive on account of the numerous beneficial aspects of the GST on the account sheet. However, start-ups in particular, that have been at the receiving end of exemptions from regulatory hassles, could face stumbling blocks in keeping up with the compliances mandated under the GST.