E-commerce has been one of the high growth industries over the last few years in India. Realizing the importance and potential of the internet, various policy measures such as Digital India and 100% foreign direct investment in various models of e-commerce have been launched by the government of India.
The dynamics and fast changing methods of e-commerce have made taxation challenging for governments across the world. A clearly defined taxation policy is needed to nurture this young yet powerful mode of doing business.
With India closing in on implementation of a goods and services tax (GST) regime, there is anticipation that the GST law will provide a stable taxing mechanism and clarity on most of the disputed issues.
Conceptualizing and defining the territorial nexus for taxing an e-commerce transaction is the most challenging aspect faced by countries world over. In the EU, initially, business-to-consumer electronically supplied services were taxed in the jurisdiction where the service provider was located. Luxembourg reduced its tax rate on such supplies and consequently business relocated to Luxembourg, creating a distortion in the concept of destination-based consumption tax. These rules were amended in January 2015 to levy tax in the state where consumer was located.
India being a union of states, it is imperative to ensure that there is no territorial war among the states in taxing such electronically supplied goods or services. The place of supply (POS) rules determine whether a transaction is interstate or intra-state, which goes on to determine the nature of tax levy. As the POS rules can be defined only by the parliament, by law, there would be certainty in legislation and variance among the states would not be a concern.
Consumer-to-business (C2B) transactions, also being called re-commerce – where second-hand good are being sold to business – are seeing a steady rise. Under India’s present laws, such C2B transactions are not chargeable to value-added tax (VAT) as the sellers are not engaged in such business. However, such goods include tax cost borne by the consumers and they are unable to pass on this cost to businesses due to tax invoicing restrictions.
This problem has been addressed in the global community by considering the price paid by the businesses to consumers as inclusive of VAT and allowing credit of VAT so computed. Perhaps the model GST law could take a cue from this and provide for a credit mechanism in such C2B transactions.
Under the model law there is an intention to strictly monitor the businesses supplying goods and services through e-commerce operators, and the e-commerce operators have been saddled with responsibilities for tax collection at source (TCS). They would have to collect tax while making payment to the vendors and file a statement giving the details. The vendors would be eligible to use such TCS to offset their output tax liability.
However, the provisions are not yet clear on whether, for the purpose of depositing TCS, e-commerce operators would be required to register in every state where the suppliers using their platform are situated. Further, if TCS is higher than the net tax payable by the supplier (i.e. tax payable after reducing credit) it may result in unintended blockage of the supplier’s working capital. It is unclear whether TCS would be collectible in a case where exempted goods or services are supplied through the electronic platform.
“E-commerce operator” has been widely defined but a person supplying their own goods and services through their own electronic portal would not be treated as an e-commerce operator. Definitions must be unambiguous as businesses may attempt to wriggle out of the definition of e-commerce operator to avoid tax collection responsibility.
Vendors supplying goods and services through e-commerce portals would need to register irrespective of threshold exemptions. This looks inequitable but may have been introduced as an anti-tax-avoidance measure. However, on a brighter note, the tax paid by such vendors on facilitation fees charged by the portal would be available as credit. Entry tax issues, faced by e-commerce operators and their transporters in certain states, would be resolved in the GST regime.
With huge amounts of investment flowing into the country towards the e-commerce sector, tax certainty is of paramount importance. Though India is late in implementing GST, it has the late mover advantage of learning from other countries’ experience.
The government has a daunting task of bringing in an unambiguous and clear law, factoring in the challenges of administration across multiple states and ensuring healthy compliance by industry.
L Badri Narayanan is a partner at Lakshmikumaran & Sridharan.