E-commerce sector is here to stay and would be one of the pillars of the Indian economy in the near future.
Businesses can thrive and grow only in a tax conducive environment and it is obvious that the above issues cannot continue forever and would need resolution sooner than later. While the e-commerce sector is eagerly looking forward to the upcoming budget to address the concerns and act as a business catalyst for the sector, the Goods & Services Tax (GST) which has replaced the indirect tax regime could hold the key to unlock the issues faced by the e-commerce sector.
Standardization of Taxes & Pricing: Under the present tax structure, different states impose different VAT rates on the same goods. For example, Karnataka has a tax rate of 5% on mobile phones, whereas Maharashtra has 13.5%. Online marketplaces list sellers who need to charge lower taxes thus making the product cheaper than local retail prices. The e-tailers often enter exclusive tie-ups to take advantage of tax arbitrage. Post GST, there will be standard tax rates for each product and tax arbitrage will not be possible, bringing e-tailers and offline sellers to the same level in terms of costing and pricing.
Ecommerce & Working Capital: Under GST, online marketplaces will have to deduct 2% tax per transaction while making payments to sellers listed on their portal. This Tax Collected at Source (“TCS”) will be handed over as collection towards GST to the government. This rule, however, does not apply to offline retailers. With TCS, capital will be locked away for periods between 20-50 days depending on the transaction date. The significant impact on the cash flow will force smaller firms to seek additional working capital or ignore the e-commerce marketplace altogether, as it may not offer envisaged convenience and benefits.
Mandatory Registration: While GST registration in the normal case is mandatory where turnover is Rs. 20 lakh or more if a trader wishes to sell through online portals he needs to get registered irrespective of turnover. Merchants without proper registration will be forced to move out of the online system. Now, all sellers will be required to be registered and charge taxes at standard rates creating a level playing ground for all online sellers in terms of product pricing.
- Additional Liability on refund & cancellation of orders: Majority of the products sold online carry a return date of 30 days which translates to about 15 - 20 million transactions per month and the returns and refunds for these have to be done with utmost care. The returns are required to be filed monthly now by both parties and refund adjustment will need special attention affecting tax liability.
There are several other issues which may be faced by Ecommerce such as adjustment of profit so not to fall under the net of anti-profiteering..
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