July 1, 2017 was a historic day for the Indian indirect tax landscape encompassing the government, industry, and professionals. With the introduction of Goods and Services Tax, hailed as one of the most transformative tax systems, India entered a ‘consumption based’ taxation regime.
Fast forward 4 years, and it has been nothing short of an exhilarating roller-coaster ride. The government and the industry has shown agility and adaptiveness in this ever-dynamic ecosystem with technology at the forefront. Yes, there have been some hits and misses, but undeniably, the regime has been largely successful in achieving its primary objective of simplifying India’s indirect tax regime by eliminating tax cascading and curbing tax evasion.
In the last 4 years, we saw GST as well as one specific sector, e-commerce, evolve leaps and bounds with each one trying to catch up with the other. E-commerce is not just about typical marketplaces for consumers to shop but also includes social commerce, C2C platforms, aggregators, payment apps, streaming services and digital supply marketplaces.
The impact from the COVID-19 pandemic has been hard with businesses and the Government alike affected due to the pandemic-induced lockdowns. The lockdowns have however pushed consumers towards online shopping. A small seller, a homemaker, a brick and mortar store or a large established chain – all can sell goods across India and e-commerce amplified the reach. Consumers relied heavily on e-commerce sites to purchase essential and non-essential items.
The e-commerce sector has established itself as a powerful ally of the tax authorities with the unique characteristic of bringing more and more taxpayers into the formal economy, as well as making available empirical data for the authorities to track consumption as well as economic disruption, and more importantly, tax evasion.
However, there is a challenge here. In its present form, the GST could be a difficult obstacle to surmount for e-commerce players, especially small sellers, given the mandatory registrations and compliances. Let us take a look at some key issues.
A seller engaged in online sales is mandatorily required to register for GST which is currently a deterrent for them to sell online, as offline sellers enjoy a threshold of Rs 40,00,000. To illustrate, a seller making online sale of goods of Rs 10,000 and off-line sales of Rs 35,90,000 is mandatorily required to register under GST, due to the online sales made by him, and the entire off-line sales would be fully taxable too. This puts the seller at a competitive disadvantage from an operational perspective, as compared to offline sellers with revenue up to INR 40,00,000. Supplementing this disparity, service suppliers are allowed a threshold of Rs 20,00,000 for registration even if they sell online. However, the same is not available for goods suppliers.
Policymakers should consider a threshold limit for registration for online sellers of goods as well. This can at least be done for intra-state sales. To alleviate any tax leakage concerns, an Aadhaar based verification can be adopted and e-commerce operators provide reporting of PAN wise sales, which would enable effective tracking.
Similarly, composition dealers are disentitled from selling online even if it is for intra-state supplies. In fact, for intra-state sales, composition dealers also should be allowed to sell online as there is no revenue loss to the government. The GST TCS mechanism can be applied on such sales as well. It will be cash neutral for the composition dealers who are anyways required to remit taxes in cash only. The Group of Ministers on MSME in its report, discussed in the 32nd GST Council meeting1, highlighted that raising the composition limit from Rs 1 Crore to Rs 1.5 crores would lead to a revenue implication of Rs 742 crore annually for all states put together. Even if composition taxpayers are to sell through an e-commerce platform on an intra-state basis, the revenue loss would be insignificant compared to the overall economic benefit of getting such dealers on to a more organised platform.
Another aspect which adds to the cost of doing business is the requirement for a physical place of business. An online seller, irrespective of its size and operations, desirous of express shipping goods to customers, is required to store goods in the warehouses managed by e-commerce operators. In such cases, registration is required in each state where the goods are stored. This requires working capital due to physical premise requirement and associated compliances.
Similar to how e-commerce operators are allowed to register pan India with the head office address, a concept of virtual place of business can be adopted for the online sellers as well. This will ensure ease of doing business without dilution of state authorities’ control. With e-commerce operators’ support and an Aadhaar based verification, the administrative efforts involved in granting registration, physical verification (where applicable) will also be mitigated.
While the issues discussed till now are more seller-oriented, policymakers should consider allowing input credit for setting up warehouses by the e-commerce operator as these are capital intensive state-of-the-art infrastructures which handle millions of supplies on a weekly basis. Credit flow would ensure lower costing structures for the entire ecosystem.
As per NASSCOM2, Indian e-commerce accounted for 4.3% of the total retail market in FY 2019-20 and is estimated to grow at 3-4 times the rate of traditional brick and mortar retail. Moreover, e-commerce sector contributed 14% of total GST collections and 4.2% of total employment in FY 2019-20 in retail.
With India being amongst the fastest growing economies of the world, it is imperative to have government intervention in policy matters including taxation, to facilitate small sellers to enter the formal economy and increase growth of the sector in the economy. This will align with the overarching objective of GST, that of a ‘one nation, one tax, one market’.