After China, India is poised to become the world’s second-largest ecommerce market. The availability of cost friendly smartphones and wireless Internet has lead to the growth of a new breed of digital-savvy customers, who demand personalized as well as seamless experience.
In the front of this digital revolution is ecommerce, basically online marketplaces which in recent years have seen substantial growth and which are fundamentally changing the way business is done.
The online marketplace as a business model has been a successful model in India,mainly because of the foreign direct investment (FDI) and regulatory norms currently in existence. So It can be rightfully said that the growth possibility of ecommerce in India is very high and is constantly expanding as you read this blog. But this growth spree might grow exponentially and deregulate the market, so there is a need for strict regulations. Therefore, GST should be a welcome step for all the online marketplaces and ecommerce businesses
What is GST?
GST is known as the Goods and Services Tax, which was introduced as the 101st amendment to the Indian Constitution and which is believed to be the biggest reform in India’s indirect tax structure.
It is anticipated as the single biggest indirect tax reform in India and is likely to introduce a simpler tax structure with a seamless credit chain. It is based on the concept of ‘One Tax, One Market’. If implemented, it can help e-commerce businesses in a big way. As per Vijay Shekhar Sharma, founder and CEO of Paytm, GST is advantageous. He mentions- “I think it is great for online businesses because it brings clarity and tax obligations. Surprisingly, GST will also open new markets for online commerce because, today, due to complexities of entry tax and other processes, customers in some states cannot order everything from online shopping destinations.”
India is finally prepared to take the GST route from 1st July 2017 (tentatively). While GST promises on ushering improvements in the indirect tax structure in India, there are several facets of GST that would challenge how businesses will operate in the coming future.
In this blog, we will help you understand the impact of GST on ecommerce marketplaces.
But, before we begin with it let us first know how GST rules define ecommerce.
How have GST rules been defined ecommerce?
In Section 43B(d) of the MGL (Model GST Law) Electronic Commerce is defined as – “Electronic Commerce to 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”.
How is GST likely to cause a positive impact on Online Marketplaces?
The Goods and Services Tax is likely to cause a positive impact by-
1. Promoting hassle free movement of goods across India
The first impact of GST is that it will help in hassle free movement of goods across India. Currently, the supply chain system of ecommerce is distorted by varied regulations and compliance’s that prevents ecommerce companies from delivering the goods on time. GST is a single tax system which would be valid for both the center as well as the states and upon implementation will help create a single unified market across India and will allow free movement and supply of goods in every part of the country.
2. Elimination of cascading Taxes-
The second most important impact from the implementation of GST would be the removal of cascading taxes. The GST model will facilitate seamless credit over supply chains as the tax set-offs would be available across the production value-chain, both for goods as well as the services. Thus, the cascading effect of taxes would be reduced which will then bring down the overall cost of supplies. This cost benefit is subsequently likely to be passed on to the consumers or would help in increasing the books of the companies.
3. Unified Tax rates-
The third important impact of GST is that it will lead to unified tax rates in India. Currently, different states charge varied rates of VAT for the same category of goods. This has in the past resulted in conflicts relevant to classification. However, with the inception of GST, the tax rates at both central & state level are expected to be systematic which would eventually reduce the conflicts. The good news is that for ecommerce and e-tailers, GST will add to this positive development because the marketplaces of this industry will become capable of managing and reduction of various components of tax in the complex service combination.
But, just as everything has another side to it, so has GST. It is believed to pose some hurdles for ecommerce firms like-
1. Accounting and compliance troubles-
As per GST bill, the ecommerce firms would be responsible for collecting TCS {Tax Collected at Source} on the supplies of goods and services made by the online suppliers. So, it will be the job of the ecommerce firms to file regular returns. This will lead to accounting troubles for ecommerce firms. Though the uniform tax law will aid ecommerce firms in offsetting the tax against output tax, this is expected to be an additional accounting responsibility on ecommerce firms.
“Until now the tax liability was on the seller and not upon ecommerce platforms but now the government will pass on the responsibility to the e-commerce operator. This means the cost of compliance will go up for companies,” said Himanshu Sinha, the partner at law firm Trilegal.
2.Working capital issues for small sellers-
As per GST, the online platforms have to necessarily subtract 2% tax on every transaction while paying the sellers listed on their portal. This collected tax is referred to as the Tax collected at source ( TCS) and is later handed over as collection to the government by online platform. This will impact the small sellers because upon paying TCS their capital will be locked for at least 20-50 days( this depends on the date of transaction). The activity will cause significant impact on the cash flow which will consequently compel small sellers to seek additional working capital.
3. Accounting for COD( Cash on Delivery), returns and cancelled order to hit cash flows-
Ecommerce in India has a return / cancellation rate of nearly 15-18%. Plus, more than two-third of the transactions in the country are still on- cash on delivery (COD), the cash reconciliation for which happens about 7-15 days later. Deducting tax at source would require e-commerce firms to bear the tax amount from their own capital and later seek refund from the government in case of returns and cancellations. Thus TCS can be a major cash flow disadvantage for ecommerce firms especially in the case of cash on delivery or orders being rejected later.
Apart from this, GST will complicate matters for the ecommerce firm, one which decides to sell an item on discount. Most ecommerce companies are recognized for heavy discounting and subsidizing of products or offering free goods with specific purchases. Under GST, freebies are expected to be taxed, creating an additional burden on the sellers. So, in case an ecommerce firm decides to sell an item on discount, then it will have to pay the tax on the price it has purchased the goods from the supplier, hence bearing the extra tax burden on its own.
Thus, it is clear that the proposed law is a mixed bag with concerted efforts required to address some of the issues above. If the above complications are addressed then GST on a large is likely to change the ecommerce scene for POSITIVE in India.
