India currently has no tax laws in place to regulate the eCommerce industry.
As industrialists in India wait with bated breath for the rollout of GST as part of the tax reforms undertaken by the Modi government, one of the biggest beneficiaries of the rollout could be the booming e-commerce sector in India.
India currently has no tax laws in place to regulate the e-commerce industry. As a result, tax imposition is done based on the interpretation of local taxation authorities in different states. Businesses suffer because the interpretation varies from state to state.
Challenges & Consequences
The challenge was brought to the fore very recently when the Karnataka tax authorities raised concerns about tax evasion by Amazon India. Questions were raised about why no VAT was being paid by Amazon and its sellers (who stock their goods in Amazon’s warehouse) for operating from the company’s warehousing facilities on the outskirts of Bangalore. Since Amazon operates on the “marketplace” model and only provides a platform for buyers and sellers to transact (not engaging in any selling directly), its reasoning was that it should not come under the purview of Sales Tax or VAT (the website gets a commission from sellers for facilitating sales) and that only Service Tax was applicable to them.
On the other hand, its sellers, who were stocking their goods in Amazon’s warehousing facility, were designating it as "an additional place of business" in contravention of the state’s VAT rules. The state tax authorities then ordered Amazon to discontinue selling some products from its Bangalore warehouse by cancelling the licenses of about 100 of its sellers supplying merchandise to that warehouse. Consequently, the company had no choice but to cancel many orders for those particular products and bear losses.
The situation would not have arisen in the first place if clear laws had been formulated proactively for the eCommerce industry. The standoff is more a result of difference in interpretation of the vague laws by Amazon and the state tax authorities.
However, if corrective measures like GST are not implemented soon, a standoff like this can jeopardize the future of many e-commerce companies that operate in a manner similar to Amazon, and compel them to shut their warehouses in states where such issues crop up.
How GST will help companies
Implementing GST will actually help eliminate the aforesaid taxation problem at the root and give a further boost to the e-commerce sector that is still at a nascent stage, yet growing exponentially, and has the potential to give a huge boost to the country’s economy in the coming years. It is currently being perceived, by the industry, as panaceato endless tax woes.
Logistics being one of the biggest hurdles so far for e-commerce companies, the roll-out of GST is likely to simplify things to a great extent. The objective of GST is to simplify and streamline the indirect tax regime in the country.
It is a single comprehensive tax regime that will be applicable across all states in India on the sale, manufacture and consumption of goods and services. Since the same tax regulation will apply across different states, e-commerce companies (as well as those from other industries) will not have to struggle with the complex regulatory structure that currently prevails in the country, and with the lack of uniform policies in different states, giving them the levy to devise their strategies in keeping with the GST norms.
Under GST, both Central and State taxes will be levied on the manufacturing cost at the point of sale, which will help eliminate the challenge of tax being levied on the same product/service more than once.
Moreover, sourcing, distribution and warehousing strategies that are currently designed by companies from the perspective of how tax liability can be minimised will change. Companies can now device these strategies based on what is actually in their best interest, since they no longer need to have a warehouse in every state as a means to minimize their tax liability.
Instead, a large warehouse at a strategic location can fulfill the demand of several states and help minimize costs. In fact, based on research it is believed that a company’s profit can increase by over 20 per cent by reducing cost by a mere 2 per cent. Going by this estimate, e-commerce companies stand to gain tremendously from GST.
Easing regulatory norms is a move that will not just benefit e-commerce companies by further accelerating their growth, but will also position the country as industry-friendly and attract more investments from foreign investors. This in turn will create a ripple effect by generating endless employment opportunities. It is, therefore, imperative that the government makes all efforts to make GST a success, since it will be a win-win for both, the industry and the economy.
The writer of this article is Ashish Jhalani, an Angel Investor, Mentor & Advisor, Founder – eTailing India and Co-founder, Indian School of eBusiness.