One would not disagree when it is said that E-Commerce has change the way business is done.  Right from purchasing of basic products like a pen to availing services of entertainment, hotels, software almost everything is now extensively sold over the e-commerce platforms.  At regular intervals new products and services are added to the list of supplies that can be made over these platforms.

With change in ways of doing business, indirect tax legislations have also kept pace with the rapidly altering models.  In the recent past, the state and central government tax authorities have been mindful of the possible tax leakages/ potential avenues to collect tax, with regard to e-commerce transactions.  The Service tax legislation was amended in 2015 to introduce a concept of ‘aggregator’ wherein the e-commerce platform was made to deposit taxes for services provided under their brand name.  Recently, service tax law was amended to levy and collect service tax on B2C and B2B digital services imported into India through e-commerce. 

State tax legislations of many states were amended to require e-commerce platforms to comply with state specific requirements.  From states like Uttar Pradesh, Madhya Pradesh, Gujarat etc. (imposing Entry tax on entry of goods sold through e-commerce platforms), to states like Delhi (where an e-commerce platform was to register and comply with local VAT laws) and Karnataka (where platform owners were sought to be made liable to deposit VAT and concept of TDS was sought to be introduced), various state authorities have amended their legislations to take into consideration supplies made on e-commerce platforms. 

One of the objectives of GST is to bring uniform taxing of transactions across the country, irrespective of the states.  Though the e-commerce sector should be relieved from diversified state level requirements, taxing of transactions under e-commerce in GST scenario shall not be simple, to say the least. 

GST – Model Law

The Model GST law (‘MGL’) has a special chapter on e-commerce transactions.  Some of the important aspects related to this proposal are discussed in this article.

1.     Tax collected at source

The biggest impact of GST on e-commerce is likely to be a concept of Tax Collection at Source (‘TCS’) by the electronic commerce operator (‘ECO’).  The important elements of TCS are:

While TCS is introduced on the e-commerce transactions, we have discussed below the impact of such provisions below:

1.1  No TCS on sales returns

The MGL of June 2016 introduced the concept of TCS but did not take into cognizance the very important element of sales returns over the e-commerce platforms.  The revised MGL of November 2016 has addressed this aspect and indicates that the TCS shall be required only on the amount of net sales made over the e-commerce platform (which should be after reducing the sales returns). 

1.2  Potential incremental cost for suppliers

The MGL suggests that the ECO shall deduct 2% of value of taxable supplies and deposit the same with the appropriate authority.  Hence, if the value of taxable supplies for a product sold at 18% is INR 100, the ECO shall collect INR 118 from the customer, pay INR 2 to the government and remit the balance INR 116 to the vendor.  Assuming a 10% margin (on sale price), the vendor would have purchased the product at INR 90 (and accumulated credit of INR 16.2).  In a normal sale transaction, the trader would have been required to deposit only on his value added i.e. INR 10.  Hence his cash outflow would have been INR 1.8. 

However, in the TCS scenario, the ECO shall retain INR 2 on the same transaction and hence the trader loses on the additional INR0.2 charged on the INR 100.  This amount is not refundable as per the current provisions.  So unless the supplier has other products where there is tax liability to be able to offset this excess TCS, transacting through an ECO can add to the total cost for the supplier. 

1.3  No TDS under IGST?

The MGL for CGST and SGST have provision of TCS.  While the IGST law does not explicitly prescribe for TCS.  However, the draft return formats issued in September seem to suggest that the ECOs shall also be required to deposit TCS on interstate supplies made under their platforms.

1.4  No TCS where payment is received directly by the supplier

The provisions of TCS shall apply only for those transactions where the consideration for the supplies is collected by the ECO.  Thus, in the case where the supplier takes the responsibility of collection of consideration, the requirement of TCS shall not arise for the ECO.  This can happen where the ECO is only acting as a booking platform, and the customer is required to pay the supplier directly when services are availed or goods are procured.

2.     GST charged by ECO not additional cost

Current tax system does not allow traders selling goods over the ECO to claim credit of service tax charged by ECO.  GST shall remove such additional cost for the trader and he shall be entitled to take GST credits against his GST liabilities. 

3.     Aggregator and different supplies under e-commerce

The MGL released in June 2016 had a concept of ‘aggregator’ (similar to the service tax concept) where such aggregator was deemed to be supplier of services provided under their brand name.  However, the relevance of brand name has been done away with in the revised MGL and the power has been granted to the Central Government or State Governments (based on recommendations of the GST Council) to notify services where the ECO shall be considered as supplier of service.  The MGL also provides for considering an overseas ECO to comply with these provisions. 

Here it is interesting to notice that the MGL provides that such services shall be notified by the Central Government or the State Government.  Thus, while it may not be intended, a fine reading of the MGL suggests that it is possible that one of the Governments notifies certain services and the other doesn’t.  This could create a lot of confusion on how much tax needs to be paid by supplier, how much by ECO and whether TCS needs to be factored in. 

It may be relevant to note that in case of notified services, the ECO are likely to be liable to pay GST on the supply irrespective of whether the payment is routed through them or not. 

4.     Registration across India

MGL requires ECO to deduct TCS and deposit with appropriate taxing authorities.  This is likely to trigger ECOs to get registered with all states where its suppliers are GST registered.

5.     Taxing digital supplies from outside India

The current change in the service tax legislation has made all overseas service providers providing digital services to Indian consumers (i.e. Individuals and Governments) to register in India and comply with service tax legislation.  Overseas service providers have been given an option to appoint a representative in India for compliances (if they don’t have any presence in India).  Such service providers shall be assesses centrally at the LTU Bengaluru.

The MGL of November 2016 has introduced identical provisions from the amended service tax law.  Further, it has been clarified that all such supplies by overseas digital suppliers shall be considered to be an interstate supply and shall always bear an IGST. 

GST is likely to have a bearing on the way ECO carry out their business operations.  On one hand is the reduction is existing hassles of state wise divergent legislations and risk of litigation and other hand is the new framework proposed under GST will mean that ECOs will have to have a clear roadmap to prepare themselves for the ‘new normal’.