Impact of Goods and Services Tax on E-commerce Businesses
The Goods and Services Tax (GST) in India introduces significant changes for e-commerce businesses, notably the Tax Collection at Source (TCS) mechanism. While aiming to simplify indirect taxes and create a unified market, GST also brings operational challenges, particularly concerning cash on delivery, product returns, and increased compliance costs. Interstate stock transfers will now be subject to IGST, potentially impacting MSMEs. The government is urged to create clear, industry-friendly regulations to foster growth and investment in the e-commerce sector.
The introduction of Goods and Services Tax (GST) has been a significant topic due to existing tax regime complexities and disputes. GST aims to alleviate these challenges. E-commerce entities find GST particularly relevant, as the proposed law outlines a Tax Collection at Source (TCS) system. Under GST, e-commerce involves the provision of goods, services, or digital products via electronic networks. An e-commerce operator is identified as any individual or entity managing an online platform for facilitating the supply of such items. The TCS mechanism mandates e-commerce companies to collect tax at a rate of 1% on the net value of taxable supplies, which must then be remitted to the government.
While GST streamlines various indirect taxes, freeing e-commerce businesses from concerns like state-level entry taxes on online sales or VAT on undisclosed warehouses, the planned tax collection methods have created some uncertainty for these companies.
The financial operations of e-commerce operators will be affected by managing cash on delivery (COD), product returns, and order cancellations. India experiences a return or cancellation rate of around 15-18%, with over two-thirds of transactions being COD, and reconciliation often takes 7-15 days. This presents a challenge for operators who must seek refunds for taxes already deducted on cancelled or returned orders. Consequently, operators will need to adapt their accounting and reconciliation processes.
Situations will arise where goods are returned because of cancellation or defects, despite TCS having been applied to the initial supply that did not fully conclude. As transaction volumes and statement submissions grow, e-commerce operators will face higher compliance costs. Furthermore, under GST, these businesses must manage stock transfers, whether from a vendor to a warehouse or between different warehouses.
Presently, stock transfers are generally exempt from tax, apart from entry tax in some cases. However, GST will subject interstate stock transfers to Integrated Goods and Services Tax (IGST), which could significantly affect Micro, Small, and Medium Enterprises (MSMEs). Overall, India anticipates the implementation of GST, a regime designed to establish a unified market and introduce a destination-based taxation system.
However, it is crucial for the government to ensure that GST streamlines regulatory requirements, thereby supporting the expansion of e-commerce companies and encouraging further investment. Clear and industry-supportive legislation is essential for the overall growth of both the sector and the economy.