GST Council caps TCS for e-commerce operators at 1%

Sneha Gilada

After reaching a significant milestone by clearing C-GST, S-GST, I-GST and UT-GST laws, the GST Council has now touched upon e-commerce, a sector which struggles with ambiguity under the current indirect tax regime.

According to the model GST law, it will now be mandatory for e-commerce platforms like Flipkart and Snapdeal to deduct up to 1% TCS (Tax Collected at Source) when making payments to sellers who use their portal to sell their merchandise.

Experts have expressed concerns regarding the ground implementation of such a tax. Such a tax, when the transaction involves an interstate movement of goods, could escalate to 2%, as it will have to be levied twice.

Industry concerns voice that the rule may discourage sellers from using digital marketplaces to sell their products, contributing to the hardships of struggling Indian e-commerce firms. The proposed tax may also lead to an increased hold up of capital. However, the capping of this tax at 1% comes as a good news to players who were worried about no such limit being mentioned in the previous draft of the law.

In the bill, the scope of an electronic commerce enterprise has been defined as any operator who sells goods and services (even digital) over an electronic network. 

E-commerce operators are expected to file returns on TCS, and in case goods are returned, such tax will not be levied due to an absence of the actual sale. Collection, payment and filing of tax returns also increase compliance burden for the industry.

The prime objective of the tax is for the state government to have a mechanism to trace vendor activity on e-commerce platforms. Since the purpose can be as well served by a tax percentage lower than the proposed 1%, experts predict that the tax may ultimately be nominal. Championed by the government of Karnataka, a state which houses some of the biggest e-tailers in India, this tax must be paid by operators to the concerned government within 10 days after month-ending (of the month in which the seller's account was credited).

CA Ami Dhabalia, Finance Manager at CouponDunia spoke to The Dollar Business on the government’s prime motivation behind the move, and said, “Most e-commerce websites are valued according to the sales they make through their platform, which should not be the case because they are merely intermediaries. The government has always argued that the taxes paid by these firms are not proportionate with their valuations.

“This may be the reason for the imposition of TCS on each transaction. This would also help tackle tax evasion, as the government would now have an accurate record of all the transactions taking place,” she added.

“As a result, compliance costs of e-commerce operators will increase exorbitantly. TCS would be deducted on each and every vendor for every transaction. For instance, Snapdeal has more than 5,00,000 sellers and Amazon claims that they have approximately 1,40,000 vendors. Even at the rate of one transaction per day for each vendor, compliance costs would escalate to very high levels,” she said.

Speaking about woes of small sellers due to the new tax law, Dhabalia said, “Until now, many small online marketplaces may not have had mandatory registration for sellers, but the TCS clause will make registration compulsory. A registration would cost nearly 30,000, which many small sellers cannot afford. Small sellers would also face liquidity issues due to a time gap between deduction and grant of the input credit claim.”

“I think India’s nascent e-commerce industry is not ready for the kind of stringent rules GST is trying to impose,” she added.

Taxation of e-commerce companies has long been a contentious issue in India, with the industry challenging the government's levy of taxes like VAT in courts. The current indirect taxation system has failed to provide adequate clarity in taxing online marketplaces. The confusion with respect to identifying the original seller has been all pervasive, disregarding the intermediary role played by digital e-commerce platforms. 

GST must take into consideration these issues and roll out a comprehensive and unambiguous tax law for the burgeoning e-commerce sector. Various kinds of business models deployed in the field of e-commerce ranging from stock-and-sell retailers to marketplace providers must be given due representation in the new tax law for fair tax collection.