GST is being hailed as the single biggest tax reform in India since Independence. Slated to roll out on July 1, this unified taxation system will subsume multiple indirect taxes — Service Tax, Central Excise, Octroi or Entry Tax, Value Added Tax — that are currently levied on goods and services, and will bring them under one tax component.
While the ramifications of such a drastic reform are still being analyzed, there are certain industries that are likely to benefit from the implementation of GST. And one of them is India’s $15 billion e-commerce sector. Under GST, e-commerce has been identified as “supply of goods and/or services including digital products over digital or electronic network.”
First, the pros of this reform.
Ease of Doing Business
Setting up a business will become easier as entrepreneurs wouldn’t have to knock on multiple doors in multiple cities and states to get VAT registrations and clearance on entry taxes — one of the biggest barriers in starting up as every Indian state has a different regulation.
As per the current VAT structure, any business with a turnover of more than Rs 5 lakh has to get a VAT registration done. Under GST, this threshold is Rs 20 lakh, thus exempting many small businesses including startups from VAT, according to a report from ClearTax, a tax solutions firm. So, there could be a growth in new startups over the next 10-12 months, and India might go a few notches higher in the World Bank’s Ease of Doing Business Index too. ALSO READ: GST impact: Here’s a look at how it affects electronics, services and automobile
Free inter-state movement of goods
GST will accelerate the inter-state movement of goods, thus enabling larger e-commerce players like Amazon and Flipkart to achieve faster deliveries. Timely, hassle-free deliveries will also facilitate more buying on the consumers’ part.
Currently, Flipkart and Amazon have to file a VAT declaration and the registration numbers of delivery trucks in certain states. Sometimes tax authorities seize shipments when the e-commerce operators fail to produce necessary documents. This results in delayed deliveries and order cancellations. In some other states, however, e-commerce firms are counted as facilitators and aren’t required to register for VAT. “All these differential treatments and confusing compliances will be removed in GST,” states the ClearTax report.
And the e-commerce industry concurs. “We believe GST is good… as it would eliminate hurdles in inter-state delivery and subsume the entry tax introduced on e-commerce shipments by some states,” an Amazon India spokesperson tells BGR India. “We are studying the GST rates for each category and currently our priority is to enable our systems to be geared up for compliance with GST regulations,” he adds.
Smaller e-commerce firms too would benefit from GST. The reform will allow them to cut down the cost of last-mile deliveries as state-wise entry taxes will cease to exist. All check-posts on state borders will be done away with and shipments will freely flow between states, thus reducing delivery windows, and bringing down cost-per-delivery.
Big push for warehousing
One of the biggest beneficiaries of GST would be the logistics and warehousing departments of e-commerce companies. Until now, Amazon and Flipkart had to maintain multiple warehouses across states and cities to avoid the central sales tax (CST) and entry-level tax of each state. This led to increased cost of operations that dented their profitability significantly.
Now with GST, they can maintain warehouses in strategic locations as there are no state-wise levies to worry about. Warehouse operators have already shown interest in setting up their warehouses at strategic locations such as Nagpur, which is the zero mile city of India and is well connected, as per ClearTax. This will lead to streamlined deliveries and happy customers. ALSO READ: Demonetization, GST to help software developer community in India: Microsoft’s Narendra Bhandari
Impetus to SMEs
Bigger e-commerce companies would no longer be compelled to source from local markets (which they would do to avoid heavy inter-state taxation) and are now free to partner with thousands of SMEs and micro SMEs across the country. This means that diverse small enterprises would be inducted into the country’s e-commerce ecosystem. And indirectly further the government’s ‘Make in India’ initiative. Amazon is already running a Global Selling Program for Indian SMEs that gives their indigenous products a global marketplace.
But uncertainties remain
There are some areas that need further addressing from the government.
For the first time, a tax collected at source (TCS) has been introduced in e-commerce, in which the operator (Amazon, Flipkart, etc.) is liable to collect a 1 percent tax from the amount payable to the supplier, and deposit it with the government. Now, this is an additional component in the tax scheme. “There can be challenges of credit accumulation with the suppliers in case the amount prescribed for TCS by e-commerce players is higher than the margin involved,” states Bipin Sapra, Tax Partner, EY India, in a report.
Furthermore, the accounting for cash on delivery (COD) — which is two-thirds of all e-commerce payments in India — as well as returns/cancelled orders would be a complex process. The order cancellation rate in India is fairly high at 15-18 percent, and in case of COD orders, the reconciliation takes more than a week to 10 days. This makes it difficult for e-commerce companies to seek refunds for cancelled orders on which CST has already been levied. And with the rise in number of transactions, compliance costs will only go north.
Some firms have identified this problem area and are taking steps to guide sellers on their platform. Paytm, for instance, has launched a comprehensive seller assistance program to help merchants on Paytm Mall (its online marketplace) to become GST-compliant. The company claims that 70 percent of its merchants are already GST-compliant.
“We have implemented GST-compliance measures across our supply chain in advance to ensure quick and efficient delivery of items ordered on Paytm Mall. Our seller platform is also GST-ready and will shift to the new tax structures instantly post launch,” said Amit Sinha, Chief Operating Officer, Paytm Mall.
In conclusion, GST is a landmark reform. And no landmark reform is without its obstacles. Only time will tell how we overcome them.