Evolution of indirect tax regime for e-commerce businesses & the future

E-commerce has completely transformed the business landscape in India over the last decade. Unlike the conventional bricks-and-mortar model, e-commerce provides much-needed convenience to the consumers in terms of doorstep delivery, wider product range, and convenient modes of payment. Further, the sector has opened innumerable avenues for new startups with business opportunities that require minimal capital investment.

The e-commerce market contributed to about 0.76% of India's GDP in 2017 and is expected to grow to 2.5% by 2030. Being the second-largest online market after China, India's rapid growth in this sector, after demonetization in November 2016 and the pandemic, growth in the digital payments market has facilitated the opportunity for future growth. Simultaneous with the sudden growth in the e-commerce sector, India's governing indirect tax laws have also evolved significantly.

Tax on 'aggregators' and 'e-commerce operators'

The term 'aggregator' was defined under Service tax laws as a person who connects the customers and their corresponding suppliers under his own brand name through a web-based software application. The service tax laws recognized online aggregators in 2015 and fastened service tax liability on them for the services rendered through their digital platforms. Before 2015, in the case of e-commerce operators, there was no tax liability with respect to supplies made by actual suppliers through their digital platforms. The online aggregators were required to pay service tax only on the commission charged from the actual supplier for supplies made by them.

With the advent of GST, a similar concept was borrowed wherein a separate charging section was assigned for taxing specified supplies made through e-commerce operators. The term 'aggregator' is replaced by 'e-commerce operator' under the new levy who is mandatorily required to take registration and liable to pay tax on notified supplies made by various suppliers through its digital platform. Under GST, an e-commerce operator is considered as the 'supplier' of notified services supplied through its digital platform, meaning thereby that all provisions of law as applicable on actual supplier including the raising of tax invoice, filing of monthly returns, and payment of tax and collection of tax shall apply to such operator.

In case of services in relation to the motor cab, radio taxi, and motorcycle, provided by a supplier, whether unregistered or registered through an e-commerce operator, liability to pay tax is on the operator. However, in case of services in relation to providing accommodation for residential purposes by hotels, etc., and services by way of housekeeping, the e-commerce operator is not liable to discharge tax liability in case the actual supplier is registered.

It is important to note that it is only in respect of the notified services that the e-commerce operator shall be deemed as a supplier. For any other services, the supplier and the operator will be required to discharge taxes on their respective outward supplies. For instance, it may be possible that the e-commerce operator acts as an intermediary and charges commission for services from the supplier of service. In such a case, the operator will be required to discharge tax only on the commission amount, and the supplier will pay applicable tax on the goods or services provided to the recipient. However, in case any amount other than commission is collected by the e-commerce operator on behalf of the supplier, it will be in the nature supplies made as a 'pure agent.'

TCS collection by the e-commerce operator
To expand the revenue base and tap leakages, tax authorities have come up with the concept of TCS under the GST law. Every e-commerce operator other than an agent is required to mandatorily register under GST and collect TCS on the net supplies made by the suppliers through their e-commerce platform, provided these suppliers are registered under GST. A supplier of goods supplying goods through an e-commerce operator is mandatorily required to obtain a GST registration, while the exemption is available for a supplier of services.

However, in the case of notified supplies where the e-commerce operator is required to discharge GST, no TCS is required to be collected by the operator.

Key issues
The GST regime has placed a heavy compliance burden on e-commerce operators. An e-commerce operator must obtain multiple registrations in all the states, both as a normal taxpayer and tax collector. The requirement becomes more cumbersome for non-resident operators who do not have any physical operation in India, but need to register for a one-off transaction in India. Such operators are usually unaware of tax laws in India, including Income Tax laws and GST. Due to the impact of e-commerce operations, a specific list of officers has been designated to adjudicate e-commerce operators in India under GST.

TCS reconciliation issues with the suppliers, complexity of arrangements, and confusion over registration requirements have made things difficult for an e-commerce operator in India. Further, the interplay of OIDAR in the scheme of things may have vast transaction-specific implications.

Conclusion
In this background, the need of the hour is to implement a robust IT-enabled tax compliance system for e-commerce operators. Further, since the sector is still diversifying into unforeseen areas and innovative business models, it will be challenging for the industry to analyse the corresponding indirect tax positions on these new models and views the tax authorities take on this evolving sector transactions.

Smita Singh is partner & Ayush Gupta is Associate at Singh & Associates.