The new tax regime has just kicked in. It is to be seen if the e-commerce industry will flourish under it. Or will Government have to change laws to address concerns
On July 1, India witnessed the onset of what is undeniably the biggest and most ambitious tax reform since independence. The long-awaited dream of ‘one nation, one tax, one market’ is now a reality with the implementation of the Goods and Services Tax (GST). This uniform taxation ensures the free flow of goods across States, thus establishing a new paradigm in the way businesses across various industries are supposed to be conducted across the length and breath of the country.
Because history of any matter needs to be probed first, let's recall the days when the GST was first proposed. The online commerce fraternity breathed a sigh of relief as the tax reform promised to do away with the entry tax on e-commerce, taking from its ‘one tax, one market' concept. Even post-implementation, it stayed true to its essence — though to a certain extent. The roll-out of the GST has enabled shipment and returns across the country to be meted out efficiently, with lesser paperwork, and is expected to boost the supply chain, leading to faster deliveries.
E-commerce firms will now be able to ideate competent supply chain strategies without the involvement of tax requirements like octroi (a duty levied on various goods entering a town/city). Most importantly, a uniform tax structure across India will ensure that goods are priced economically and margins are calculated without worrying about the location of shipping.
However, delving a little deeper, it will appear that online shopping through e-commerce portals has become more expensive post-GST due to an additional tax burden, which the buyer has to bear. This further menat that all e-commerce websites, irrespective of their turnovers, will have to register for the GST.
While the GST council has granted a relief to the textile industry — most textile and yarn will now be taxable at five per cent — readymade garments above Rs 1,000 have been kept in the 12 per cent bracket which is higher than the existing seven per cent. There's also a considerable rise in the administrative cost for the textile industry. Although the GST has increased the tax rate, it has now allowed claiming input credit between six to nine per cent. So, while one of the fastest growing sectors in the country is striving to catch up with the latest tax regime, it looks like the e-commerce firms may come out with the short end of the stick.
Having said that, e-commerce firms who had been paying 15 per cent service tax until now will have to pay an additional three per cent tax under the GST. Usually, the goods that are sold on e-commerce are charged at lower Value Added Tax (VAT) rate of five to six per cent or a higher rate of 12-14 per cent, based on the existing VAT rate of the State, as per the location of the seller and nature of the transaction. With the implementation of GST, the applicable rates would be 12 per cent as the merit rate or 18 per cent as the standard rate.
These rates are likely to escalate the prices of goods and services on e-commerce sites, at least in the initial phase. Further, complications would arise with the dual GST model — the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST). For instance, if a seller wants to ship his product to another State, he would have to consider the prevailing Integrated Goods and Services Tax (IGST) for each State of delivery, instead of the prevailing rule of learning the applicable tax rate of the operating State only.
Meanwhile, e-commerce players, who owe warehouses to store inventory, too will have to face the heat as they will have to shell out 17-18 per cent of GST instead of the previous 12.5 per cent. This will thus drive up the costs. Additional burden will be the compulsory taxes on unsold inventory held in warehouses, which will coerce them to maintain their inventory at a minimum level. The stringent return and cancellation policy forcing the e-commerce firms to bear a return or cancellation rate of nearly 18 per cent will pose a major cash-flow disadvantage for them, even though they might be eligible for a refund from the Government.
Although we are still in the initial implementation stages of the GST, multiple registration processes and compliances are already weighing down on the e-commerce players. E-commerce firms are required to register in all States and Union Territories where they operate and file returns accordingly. As opposed to one service tax being filed previously compliance requirements will multiply as firms will have to file three returns per month — Goods and Services Tax Rules 1, 2, 3. As if the classification issues weren’t enough for e-commerce players, the involvement of logistics/reverse logistics, advertising and promotion services, goods like software, music, e-books etc will further make it difficult to differentiate the goods and services component of each transaction.
As per a study conducted by the Internet and Mobile Association of India, the country's e-commerce market is expected to generate $100 billion online retail revenue by 2020. But with e-commerce firms mired in a host of taxes and lack of clarity on several aspects, including the treatment of discounts and freebies, there are multiple challenges that the firms will have to undergo apart from the already existing problems such as rising competition, shrinking profit margins, etc.
While a few have lauded the standardisation that the GST promises, it is for us to wait and watch whether e-commerce firms will flourish under GST, or whether the Government will re-evaluate the proposed law under the GST to address the concerns raised by e-commerce players.
(The writer is the founder and chief executive officer of Zapyle)