E-Commerce

This article has been written by Nishant Singh pursuing a Diploma in Tax Litigation and Advanced Corporate Taxation from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Now that e-commerce has become synonymous with convenience, it is only expected to see a positive growth in numbers. Where companies are targeting to deliver your needs in a blink of an eye, how can we resist ourselves from tapping that place order button? The statistics by Forbes report that the global e-commerce market will total over US$ 8.1 trillion in market share by 2026. A Deloitte India Report forecasts India’s online retail market size to touch US$ 325 billion by 2030, up from US$ 70 billion in 2022. With customers now moving online, businesses need to jump in too and explore the enormous potential of the space. It is also relevant to understand the tax implications that need to be kept in mind.

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This article primarily attempts to cover e-commerce transactions from a goods and services tax (GST) standpoint and to assist all the upcoming and existing businesses planning to begin with their e-commerce journey.

Understanding e-commerce 

Going by the statutory definition as contained under Clause 44 to Section 2 of the Central Goods and Services Tax Act, 2017 (the Act), electronic commerce is defined as supply of goods or services or both, including digital products, over digital or electronic network. It implies a channel whereby commercial transactions involving supply of goods or services or both, are facilitated electronically.

A person who owns, operates or manages such a facility or channel electronically over the internet in order to facilitate such e-commerce transaction is known as an electronic commerce operator (ECO). Common examples of ECO include Flipkart, Amazon, Zomato, etc.

Taxation of e-commerce

The taxability of e-commerce transactions under GST arises when there is a supply of goods, services or both. Where goods or services supplied are exempt from being chargeable to tax under GST, there is no liability. An instance of this includes supplying alcoholic liquor for human consumption, which is outside the ambit of being leviable to tax under GST.

Liability of registration

Registration under GST is the most crucial requirement for a supplier of goods, services or both. It comes with several advantages, including being a legally recognised supplier and being able to collect tax from its customers. It also acknowledges the right of a supplier to claim input tax credit on the purchases being made by it. It makes it imperative to quickly go through the categories of people essentially required to comply with this requirement.

Section 24 of the Act provides a list of persons who are mandatorily required to get registered under the Act. It includes:

  • every electronic commerce operator who is liable to collect tax at source (TCS) under Section 52 of the Act, irrespective of the annual turnover he is making;
  • where an ECO or a person representing such ECO is making supply of certain specified services that have been notified by the Central Government by exercise of powers conferred to it under Section 9(5) of the Act or Section 5(5) of the Integrated Goods and Services Tax Act, 2017, every such ECO and persons; and,
  • every person supplying goods or services or both through an ECO, other than supplies notified under Section 9(5) of the Act, upon which TCS is not to be collected by ECO.

(In cases where TCS is not required to be collected by ECO, such person supplying goods or services or both would be required to be registered only where his aggregate annual turnover exceeds a certain threshold limit.)  

Liability of ECO under Section 9(5) of the Act to pay output tax on specified supply of services

The Central Government is empowered to notify services, the output tax on supply of which is to be payable by the ECO through which such supplies are being made. And, in cases where such an ECO is not located in India, the ECO is to appoint a person who will be acting on his behalf for the purposes of being liable under the Act and to pay tax.

It is pertinent to note that the provision empowering the Central Government to make an ECO liable under the Act, confines itself to only the supply of services and not goods in any case. Essentially, it means that numerous ECOs, such as Flipkart, Myntra and other similar operators solely supplying goods, are uncovered by the applicability of this provision.

By virtue of the power being conferred, the Central Government has notified certain services on intrastate supplies of which the tax is to be paid by the ECO supplying it. It implies that the invoice for the supply of such services is to be issued by ECO. The notified services are as follows:

Transportation of passengers (Notification No. 17/2017- Central Tax (Rate) dated 28.06.2017) – Where a person is involved in providing services in the nature of transport by a radio taxi, motor cab, maxi cab or motor cycle, the ECO shall be liable to collect and pay the tax even in cases where the supply of service is made by a registered person. Therefore, Ola and Uber become liable to collect and pay GST on behalf of the person running the cab.

Accomodation services (Notification No. 17/2017- Central Tax (Rate) dated 28.06.2017)- Providing services of accommodation in hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes by a person will make the ECO liable to collect and pay tax. For instance, OYO Rooms would bear the burden of tax collection and payment, not the unregistered hotel owner.

However, where the person supplying such services is liable to attain registration under the Act, the burden would shift to the person supplying them.

Housekeeping Services (Notification No. 23/2017- Central Tax (Rate) dated 22.08.2017)- Where a person books plumbing services from Urban Company, the liability of collection and payment of tax would lie with Urban Company rather than the actual plumber. However, where such plumber is liable to registration under the Act, the ultimate burden would be borne by him.

Restaurant services (Notification No. 17/2021- Central Tax (Rate) dated 18.11.2021)- Supplying restaurant services, cloud kitchen services, eating joints, etc. through an ECO such as Zomato or Swiggy would involve collection and payment of tax by such an ECO, except in cases where such services are provided by restaurants, etc. at a place where the premises also provide hotel accommodation service with a declared tariff equivalent to or above INR 7500 per day for a single unit in such a hotel. A cloud kitchen engaged entirely on orders placed through online aggregators would not be liable to bear the burden of collection and payment of taxes.

Liability to collect TCS under Section 52

Irrespective of any threshold being applicable, every ECO is liable to collect an amount of 1% (0.5% CGST + 0.5% SGST/ 1% IGST) on the net value of taxable supplies made through its channel by a supplier of goods or services or both, where consideration in respect of the supplies are received by such ECO. Here, the net value of taxable supplies would be calculated by ignoring the supply of transportation, accommodation, house-keeping and restaurant services notified by the Government under Section 9(5) of the Act, along with the aggregate value of taxable supplies that have been returned during a month. It can be summed up as follows:

Gross value of taxable supplies                                                   

Less: Supplies of services notified under Section 9(5)

Less: Taxable Value of supplies Returned

_______________________________________________

     Net value of taxable supplies____________________

Impact of GST on e-commerce in India

The implementation of the Goods and Services Tax (GST) in India has had a significant impact on the e-commerce industry.

Tax simplification:

GST replaced various indirect taxes, such as VAT, excise duty, and service tax, with a single unified tax. This simplified the tax structure for e-commerce businesses, making it easier to comply with tax regulations. It eliminated the need for businesses to maintain separate records and comply with different tax laws, reducing the administrative burden and costs.

Transparency and efficiency:

GST introduced a transparent and efficient tax system for e-commerce businesses. The online GST portal provides a centralised platform for businesses to register, file returns, track refunds, and manage tax-related activities. This simplified the process of tax compliance, reduced manual paperwork, and improved overall efficiency.

Uniform Tax Rate:

GST imposes a uniform tax rate of 18% on most goods and services, including e-commerce transactions. This brought uniformity in taxation across the country and reduced the burden of multiple tax rates for e-commerce businesses. The uniform tax rate facilitated smoother inter-state trade and simplified pricing strategies for businesses.

Input Tax Credit:

The GST regime allows e-commerce businesses to claim input tax credit (ITC) on taxes paid on inputs and services used for business purposes. This mechanism helps businesses reduce their overall tax liability. ITC helps businesses offset the taxes paid on purchases against the taxes payable on sales, reducing the cascading effect of taxes and improving overall profitability.

Increased compliance:

GST has led to increased compliance among e-commerce businesses. The stringent GST laws and regulations have prompted many businesses to formalise their operations and comply with tax regulations. The GSTN portal provides robust tracking and monitoring mechanisms, making it difficult for businesses to evade taxes.

Expansion of e-commerce:

GST has facilitated the expansion of e-commerce in India by reducing tax complexities and creating a more conducive environment for online businesses. It has encouraged small and medium-sized enterprises (SMEs) to adopt e-commerce as a viable business model. The uniform tax rate and simplified compliance process have made it easier for SMEs to enter the e-commerce market and compete effectively.

Challenges:

Despite the positive impact, GST also presented certain challenges for e-commerce businesses. Some common issues included:

  1. Initial complexities in GST registration:
    E-commerce businesses faced initial complexities in GST registration, especially during the transition phase from the previous tax regime. The registration process involved multiple steps, documentation, and technical requirements, which some businesses found challenging to navigate.
  2. Understanding GST provisions:
    The GST laws and regulations were initially complex, and e-commerce businesses needed time to understand and interpret them accurately. Clarifications and amendments issued by the GST Council helped simplify the provisions over time.
  3. Managing compliance requirements:
    GST compliance requirements, such as filing returns, managing invoices, and claiming input tax credit, were initially challenging for many e-commerce businesses. Businesses had to adapt their accounting systems and processes to meet the new compliance requirements.

Overall, the impact of GST on e-commerce in India has been largely positive, leading to tax simplification, transparency, and increased compliance. GST has contributed to the growth and expansion of the e-commerce sector in India by creating a more conducive environment for online businesses

Interpretation of e-commerce provisions as contained under the GST Act

The interpretation of e-commerce provisions contained under the Goods and Services Tax (GST) Act is crucial for determining the taxability of various online transactions and ensuring compliance with the law. Here are some key aspects and interpretations to consider:

  1. Definition of E-Commerce:
    • The GST Act defines e-commerce as the supply of goods or services or both, over the internet or an electronic network.
    • It encompasses a wide range of online transactions, including sales of physical goods, digital products, online services, and more.
  2. Place of supply rules:
    • The GST Act provides specific rules to determine the place of supply for e-commerce transactions.
    • For goods, the place of supply is generally the location where the goods are delivered.
    • For services, the place of supply is determined based on factors such as the location of the service provider and the recipient, the nature of the service, and the terms of the contract.
  3. Taxability of e-commerce transactions:
    • The taxability of e-commerce transactions depends on various factors, including the nature of the goods or services supplied, the location of the supplier and the recipient, and the value of the transaction.
    • Goods and services supplied through e-commerce are generally subject to GST unless they are exempt or fall under a specific exemption.
  4. Registration requirements:
    • Businesses engaged in e-commerce may be required to register for GST if their annual turnover exceeds the prescribed threshold.
    • The registration process involves obtaining a GST Identification Number (GSTIN) and filing regular GST returns.
  5. Compliance obligations:
    • E-commerce businesses are required to comply with various GST obligations, such as filing GST returns, maintaining records of transactions, and issuing invoices with the prescribed details.
    • Failure to comply with these obligations may result in penalties and other legal consequences.
  6. Digital marketplace operators:
    • Digital marketplace operators, such as e-commerce platforms and online marketplaces, have specific responsibilities under the GST Act.
    • They are required to collect and deposit GST on behalf of the suppliers using their platform, known as the TCS (Tax Collected at Source) mechanism.
  7. Cross-border e-commerce:
    • The GST Act also addresses cross-border e-commerce transactions, where goods or services are supplied from one country to another.
    • Specific rules apply to determine the taxability and compliance requirements for cross-border e-commerce transactions.
  8. GST rates and exemptions:
    • The GST rates for e-commerce transactions vary depending on the nature of the goods or services supplied.
    • Certain goods and services are exempt from GST or subject to a reduced rate of GST.
  9. Reverse charge mechanism:
    • In certain cases, the GST Act provides for a reverse charge mechanism, where the recipient of the goods or services is liable to pay GST instead of the supplier.
    • This mechanism is applicable in specific situations, such as when the supplier is not registered for GST or when the recipient is a government entity.
  10. Invoice requirements:
    • E-commerce businesses are required to issue invoices for all taxable supplies made through their platform.
    • The invoices must contain specific details, such as the GSTIN of the supplier and the recipient, the description of the goods or services supplied, the quantity, the value, and the GST amount charged.
  11. Anti-profiteering provisions:
    • The GST Act includes anti-profiteering provisions to ensure that the benefits of reduced GST rates or exemptions are passed on to consumers.
    • E-commerce businesses are required to maintain records to demonstrate that they have passed on the benefits of reduced GST rates or exemptions to their customers.
  12. GST audit and inspection:
    • The GST authorities have the power to conduct audits and inspections of e-commerce businesses to verify compliance with the GST laws.
    • Businesses are required to cooperate with the GST authorities and provide all necessary information and records during such audits and inspections.
  13. Penalties and consequences:
    • Non-compliance with the GST provisions, such as failure to register for GST, file GST returns, or issue invoices, may result in penalties and other legal consequences.
    • The penalties may include fines, interest on unpaid taxes, and even imprisonment in severe cases.

By understanding and complying with the GST provisions applicable to e-commerce, businesses can ensure smooth operations, avoid legal complications, and contribute to a transparent and compliant e-commerce ecosystem.

Conclusion

With the e-commerce space being a win-win for both the suppliers and the customers, more and more businesses will come up to turn themselves into an e-commerce venture. Undoubtedly, we are going to witness massive growth in this space. The government would aim to leave no transaction unnoticed and with this, it has proactively ensured to lay a remarkable framework for taxing these transactions.

References

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