Will GST choke the online marketplace?

Complex tax issues, fewer concessions under GST could impact e-commerce firms in the country

India, the second largest market for e-commerce, is expected to breach the $100 billion mark by 2020. As per a study conducted by the Internet and Mobile Associations of India, the market is estimated to have crossed Rs 211,005 crore in December 2016. This explosive growth in the sector has given rise to the concept of the online marketplace.

What is an online marketplace? It is basically a place where products from multiple vendors are available on the same digital platform. It facilitates supply of both goods and services over a digital or electronic network. With the GST rolling out on July 1, the sector is set to witness multiple tax issues, along with others such as rising competition and declining profit margins.

The government has specified a threshold revenue limit for various business, after which they will be liable to register under GST. However, no such threshold has been specified for e-commerce businesses, which means they are required to register under GST irrespective of their turnover. Besides, e-commerce businesses have also been excluded from the composition scheme of the GST, which aims to reduce the burden of compliance for small and medium businesses. For example, SMBs are normally required to file quarterly returns instead of monthly and pay taxes at nominal rates. This concession is not available to a small e-commerce set up.

The government has made it compulsory for e-commerce business to get themselves registered in all the states where they are supplying goods. Under GST, online market places are required to deduct one per cent tax collected at source (TCS) per transaction while paying to the sellers listed on their portals. The TCS will have to be deposited with the government as collection towards GST. This will lock around 20 per cent of the capital of the e-commerce companies for 20-50 days, thereby increasing  their requirement of working capital.

Products sold online carry a return date of 30 days. Returns will now be required to be filed monthly by both parties and refund adjustment will need special attention as it will affect tax liability.

The biggest disadvantage for e-tailers will be the loss of price advantage due to tax arbitrage. There will be standard tax rates for each product, bringing e-tailers and offline sellers to the same level in terms of costing and pricing.  

The government has used GST as a tool to regulate the online marketplace by applying it extensively to the e-commerce segment. There has been an exponential increase in third party sellers in recent times and such sellers are now sceptical about the compliance requirements under the new tax regime.