The government has released a Model Goods and Service Tax (GST) Law for consultation from public forums after the conclusion of the meeting of the Empowered Committee of the State Finance Ministers in Calcutta in June 2016. The model law has 162 clauses and four schedules, and also includes the GST Valuation (Determination of the Value of supply of Goods and Services) Rules, 2016.
The draft takes significant steps in framing a law relating to the taxation of e-commerce in India. E-commerce, as an emerging sector, was constantly being mired in indirect tax litigation in many states and was also being subject to taxes and compliance requirements imposed almost whimsically by states to generate tax revenue from transactions originating and concluding in their territories. In such a situation, most e-retailers were looking forward to the forthcoming GST law to bring clarity into such levies. They also anticipated a mature non-adversarial law which would break down compliance barriers and usher in a uniform tax regime for their sector.
The central government's new draft law makes all types of purchases made online subject to a uniform tax rate.
The central government's new draft law makes all types of purchases made online subject to a uniform tax rate. This is in line with the aim of the GST to be a uniform tax fabric for the entire country in respect to major indirect taxes. A separate chapter titled "Electronic Commerce" has been incorporated into the draft law, which also introduces key definitions to certain aspects of the industry which were, till now, vague and were consigned to interpretations from both the imposing authority and the taxpayer. Terms like "aggregator", "e-commerce", "address of delivery", "time of supply of goods", "electronic cash/credit ledger", "e-commerce operator", which are essential facets of the electronic trade and commerce industry have now been defined under the law.
The most important part of the law is Clause 43C, which is the new tax collection at source (TCS) model that has been introduced for the e-commerce sector. This TCS model essentially proposes to tax goods and services in online transactions at the first point of transaction. This means any payment made to a supplier would be subject to a TCS at the notified rate. This immediately increases the compliance burden on the e-commerce companies as they have to keep track of each and every supplier using their platform. Further, cash flow woes will increase significantly on suppliers (especially small suppliers) as they may have to take a refund route in cases where they are not able to offset their taxes.
A major fallout of the proposed TCS regime will be the burden on all e-commerce platforms to file detailed information on all supplies made from the platform...
A major fallout of the proposed TCS regime will be the burden on all e-commerce platforms to file detailed information on all supplies made from the platform as a rigorous disclosure regime is proposed to be notified. While this does ensure that all supplies are tracked and taxed, and does away with state entry forms etc, the TCS system practically means that every e-commerce operator (and not the supplier) is now legally responsible to deposit the tax deducted from every supplier to the government. In today's scenario, where IT systems are sluggish and often non-responsive, accounting for every single transaction done by each and every supplier on the platform might be a herculean task.
The e-commerce sector has been one of the biggest movers of the Indian industry. With the business expanding, various companies have also been experimenting with various tax structures (stock/sell, marketplace etc) to implement the best cost-effective and compliant model. There have been teething problems into classifying offerings like software, e-books etc into either goods or services which has opened the door for the taxman to barge in with his rule book of interpretation. In this scenario, the need of the hour was essentially a harmonious law which would clear the various interpretations, impose a uniform tax structure, lessen the compliance burden and ensure a non-adversarial regime between the taxpayer and revenue. With the new draft law attempting to provide some clarity by introducing key sectorial definitions and the introduction of the TCS system mentioned above, a positive start has been achieved; but the hardening of the compliance framework for e-platform operators and the continued absence of harmonious interpretations of key transactions like taxability of cash on delivery sales, cab operators operating on cash options, use of e-wallets etc leaves a significant hole in the evolution of the law.
Whether or not it brings about a non-adversarial, non-cumbersome, business-friendly regime is an answer which only time will tell.
That being said, the new model law is a significant improvement from the first draft. It shows that the government is committed to introducing a judicious financial law in the country. Whether or not it brings about a non-adversarial, non-cumbersome, business-friendly regime is an answer which only time will tell. For now, the e-commerce sector can quietly rejoice that at least some of their difficulties may have finally been answered by the draft proposal.
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