How Goods and Services Tax Affects E-commerce Marketplace Vendors

India's digital commerce sector demonstrated significant growth, with market value exceeding Rs. 211,005 crore by December 2016, according to the Internet and Mobile Association of India (IAMAI). Projections indicated that online retail revenues in India would reach $100 billion by 2020. This expansion fostered the emergence of online marketplaces, which are e-commerce platforms managed by operators like Flipkart, Snapdeal, and Amazon. Key characteristics of this marketplace model include:

• Third-party vendors can register and conduct sales through the platform.
• Marketplace operators levy subscription charges or commissions based on the sales value from these vendors.
• Participating sellers benefit from increased visibility to a broader customer base associated with the marketplace.
• Consumers gain access to a diverse range of sellers and competitive pricing for desired goods.
• Products bought via these platforms are dispatched either directly by the merchant or third-party seller, or through the fulfillment centers managed by the marketplace operator.

To foster the e-commerce marketplace framework in India, the government has permitted Foreign Direct Investments (FDI) in this sector. Marketplaces offer retailers an extended sales channel and reach, previously unattainable for traditional brick-and-mortar businesses. Leading marketplaces report hosting hundreds of thousands of affiliated sellers offering millions of Stock Keeping Units (SKUs). Despite the substantial growth in seller numbers and business volume, the Goods and Services Tax (GST) framework has introduced specific regulations tailored for this segment. These new compliance demands have necessitated that online sellers adopt the GST system. Key compliance requirements include:

GST Registration Threshold Exemption

Normally, businesses must register for Goods and Services Tax once they exceed a specific turnover threshold. However, this general threshold does not apply to e-commerce sellers. E-commerce businesses are generally exempt from GST registration if their total sales remain below Rs. 20 lakh, as per Notification No. 65/2017 – Central Tax dated November 15, 2017.

Exclusion from Composition Scheme

Many vendors operating on marketplace platforms are small and medium-sized enterprises. The government implemented the GST composition scheme to ease the compliance load for such businesses, allowing them to file quarterly returns instead of monthly and pay taxes at low rates, typically up to 2%. Nevertheless, GST regulations explicitly exclude e-commerce businesses from participating in this scheme.

Tax Collection at Source (TCS) by Marketplace Operators

The current tax framework mandates that marketplace operators deduct a specific percentage from a seller's GST liability and remit it to the government. This process is known as 'Tax Collection at Source (TCS)' under GST law. Consequently, marketplace sellers must submit monthly GST returns to claim credit for the TCS collected by the operator, which can affect their liquidity and cash flow. Although marketplace operators have largely analyzed the GST impact on their own operations, many marketplace sellers remain uninformed about these regulations. It is crucial for these sellers to stay updated on impending changes and proactively develop their GST transition strategies.

Essential Steps for E-commerce Sellers

Crucial considerations for e-commerce sellers include:

1. Ensure timely completion of your GST registration process.
2. Carefully strategize your logistics and warehousing needs.

While GST implementation is still evolving, marketplace sellers have limited time and are strongly encouraged to make proactive business decisions regarding their GST transition.