GST in India & its impact on E-commerce industry
GST is one indirect tax for the whole nation, for the whole nation, which will make India one unified common market.
The Constitution Amendment Bill for Goods and Services Tax (GST) has been approved by The President of India post its passage in the Parliament (Rajya Sabha on 3 August 2016 and Lok Sabha on 8 August 2016) and ratification by more than 50 percent of state legislatures. The Government of India is committed to replace all the indirect taxes levied on goods and services by the Centre and States and implement GST by April 2017.
GST will be a game changing reform for the Indian economy by creating a common Indian market and reducing the cascading effect of tax on the cost of goods and services. It will impact the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization and reporting, leading to a complete overhaul of the current indirect tax system.
GST would replace most indirect taxes currently in place such as:
1. Central Taxes
- Central Excise Duty [including additional excise duties, excise duty under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955]
- Service tax
- Additional Customs Duty (CVD)
- Special Additional Duty of Customs (SAD)
- Central Sales Tax ( levied by the Centre and collected by the States)
- Central surcharges and cesses ( relating to supply of goods and services)
2. State Taxes
- Value-added tax
- Octroi and Entry tax
- Purchase tax
- Luxury tax
- Taxes on lottery, betting and gambling
- State cesses and surcharges
- Entertainment tax (other than the tax levied by the local bodies)
- Central Sales tax ( levied by the Centre and collected by states)
GST will have a far-reaching impact on almost all the aspects of the business operations in the country, for instance, pricing of products and services, supply chain optimization, IT, accounting, and tax compliance systems.
Impact on E-commerce
Currently, the federal indirect tax structure with different tax regimes in various
States has led to confusion and uncertainty on the tax treatment of online marketplaces and aggregators. It is felt that having clear and defined laws will help remove the ambiguity that currently exists in this sector, and insulate such operators from ad hoc laws and arbitrary levies imposed by State governments.
To this end, the Model GST Law has incorporated a separate chapter on E-commerce transactions.
- Higher compliance costs
The Model GST Law casts an obligation on every electronic commerce operator to collect tax at source (TCS) and deposit applicable GST when payments are to be made to the supplier. This will significantly increase the onus and compliance burden on electronic commerce operators, as many of them have a large number of vendors.
- Stock transfers to be taxed
Under the Model GST Law, specified transactions without consideration would also be treated as supplies. Intra-state and inter-state stock transfers, between branches or warehouses of a single e-commerce entity, would be deemed to be supplies, subject to GST. Though the tax paid would be available as credit to the entity, this may result in cash flow blockages. Example, where large quantities of goods are stock transferred, tax liability would arise at this first stage which can only be offset at the time of final supplies by the e-commerce entity.
- Credit available only when tax is paid
Credit can only be claimed on taxes which have been paid to the credit of the government.
- Consolidated tax rates: Currently, there are differential rates of VAT for the same goods in different States with further fragments of VAT rates. This has in the past resulted in classification disputes. However, GST rates at both the Central and State levels are expected to be uniform and harmonized which would reduce disputes.
- Removal of cascading taxes: The e-commerce sector will gain significantly from the removal of restrictions on cross utilization of credits. Currently, traders are denied credit of service tax paid on input services such as warehousing, logistics, commission of marketplace and service providers are not allowed to claim credit of VAT paid on goods that are used for providing output services. This cascading results in a significant blocked input tax cost for this sector since VAT is applicable on the output side, whereas most input costs are services. The GST model will therefore facilitate seamless credit across supply chains, with tax set offs available across the production value-chain, both for goods and services. This will result in reduction of cascading effect of taxes.
- Reduction in prices: As GST will help in the reduction of cascading tax effects, it will also help in bringing down the overall cost of supplies. It is hoped that this cost benefit would be ultimately passed on to the customers. But much will also depend on the GST rates. Currently, there are quite a few goods where the combined VAT and service tax rate is 17 percent.
To sum up, GST will certainly aid e-commerce but a reduction in prices will depend on rates and the willingness of vendors to pass on some of the tax offsets.