E-commerce has completely changed the business landscape in India over the past decade. In contrast to the traditional stationary model, e-commerce offers consumers the much-needed convenience in terms of door-to-door delivery, a wider range of products and convenient payment methods. In addition, the sector has opened up myriad opportunities for new startups with business opportunities that require minimal capital investment.
The e-commerce market contributed around 0.76% of India’s GDP in 2017 and is expected to grow to 2.5% by 2030. As the second largest online market after China, India’s rapid growth in this sector after November 2016 demonization and the pandemic, the growth of the digital payments market has opened the possibility for future growth. Simultaneously with the sudden growth of the e-commerce sector, India’s indirect tax laws have also evolved significantly.
Tax on “aggregators” and “e-commerce operators”
The term “aggregator” was defined in service tax law as a person who connects the customers and their respective suppliers under their own brand name via a web-based software application. The service tax laws recognized online aggregators in 2015 and imposed the service tax liability on the services provided through their digital platforms. Prior to 2015, e-commerce operators had no tax liability in relation to deliveries from actual suppliers via their digital platforms. The online aggregators only had to pay a service tax on the commission charged by the actual vendors for supplies they made.
With the advent of the GST, a similar concept was adopted, allocating a separate section of fees for taxing certain supplies by e-commerce operators. The term “aggregator” will be replaced by “e-commerce operator” within the framework of the new levy, who is subject to registration and tax for registered deliveries from various providers via its digital platform. According to the GST, an e-commerce operator is considered to be the “supplier” of the reported services provided via its digital platform; the tax and tax collection apply to this operator.
In the case of services in connection with the driver’s cab, radio taxi and motorcycle that are provided by a provider that is not registered or that is registered via an e-commerce operator, the operator is liable for tax. In the case of services in connection with accommodation for residential purposes by hotels etc. as well as in the context of housekeeping, the e-commerce operator is not liable for tax if the actual provider is registered.
It is important to note that the e-commerce operator is only considered the provider in relation to the registered services. For all other services, the provider and the operator are obliged to pay taxes on their respective outbound deliveries. For example, the e-commerce operator may act as an intermediary and collect commissions for services from the service provider. In such a case, the operator is obliged to tax only the commission amount and the supplier pays the applicable tax on the goods or services delivered to the recipient. However, if an amount other than the commission is collected by the e-commerce operator on behalf of the provider, this is done naturally as a “pure representative”.
Collection by the e-commerce operator
In order to expand the income base and tap leaks, the tax authorities have developed the concept of the TCS in accordance with the GST Act. Every e-commerce operator who is not an agent is obliged to register according to GST and to levy TCS on the network deliveries made by the providers via their e-commerce platform, provided that these providers are registered according to GST. A goods supplier who delivers goods through an e-commerce provider must apply for GST registration, while the exemption is possible for a service provider.
In the case of reported deliveries for which the e-commerce operator has to pay GST, the operator does not have to collect a TCS.
The GST regulation has placed a high compliance burden on e-commerce operators. An e-commerce operator must register multiple times in all states as both a normal taxpayer and a tax collector. The requirement becomes more cumbersome for non-resident operators who do not have physical operations in India but need to register for a one-time transaction in India. These operators are typically unaware of the tax laws in India, including the income tax laws and the GST. Due to the impact of e-commerce operations, a special list of officials has been appointed to assess e-commerce operators in India under GST.
TCS coordination issues with suppliers, the complexity of the agreements and confusion in registration requirements have made things difficult for an e-commerce operator in India. In addition, the interaction of OIDAR in the schema of things can have far-reaching transaction-specific effects.
With this in mind, it is the order of the day to implement a robust IT-based tax compliance system for e-commerce operators. As the sector continues to diversify into unforeseen areas and innovative business models, it will be challenging for the industry to analyze the corresponding indirect tax positions on these new models and the views of tax authorities on these evolving sector transactions.
Smita Singh is a partner and Ayush Gupta is an associate at Singh & Associates.