4 minute read 6 Mar 2023
Changes impacting e-commerce operators

How Budget 2023 changes are likely to impact the e-commerce operators in India

By EY India

Multidisciplinary professional services organization

4 minute read 6 Mar 2023
Related topics Tax Tax controversy E-commerce

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GST changes and Budget proposals are likely to impact the e-commerce companies.

In brief 

  • What was an already rapidly evolving sector in India, e-commerce has grown immensely in the post-COVID era with sales of US$9.2b in FY221.
  • To enable higher commercial activity online, Government of India is creating sovereign digital platforms like Open Network for Digital Commerce (ONDC).
  • Changes related to GST announced in the latest budget are also likely to impact e-commerce companies. 

Union Budget proposals recently announced have focussed on two aspects of e-commerce

A. Enabling composition “goods” sellers on online platforms 

Currently, persons supplying goods up to a turnover of INR15 million (INR7.5 million in specified states) have the option to opt for a composition scheme for payment of GST. Under this option, the supplier has to pay tax on the turnover (ranging from 1 to 5%) without recovering any input tax credits. Only “within state” sales are permitted. Taxes paid under composition are not recoverable by buyers. This scheme works well for suppliers in B2C space. This option was not available for suppliers selling goods through online platforms.

For example, a small and medium enterprise with a turnover of INR10 million selling ready-made garments can opt to pay 1% GST on offline sales. However, if they sell the same garments on an online platform, they would have to pay GST at 12%. This created disparity.

The budget 2023 proposals are aimed at eliminating this taxation imbalance between offline and e-commerce transactions. It is now proposed to allow composition dealers to sell goods through online platforms. The change will be from a date to be notified. 

Furthermore, in the 47th GST Council meeting (29 June 2022) has also announced that unregistered persons will also be permitted to sell goods through e-commerce platforms. This change is yet to be implemented (and could be notified in sync with the change for composition dealers).   

The Council also suggests that a mechanism would be set up to monitor turnovers of both categories of suppliers to ensure appropriate compliance with GST regulations. These are welcome changes. They will enable more sellers to reach wider set of customers. 

At the same time, Budget also expects ecommerce platforms to particularly monitor sales by their unregistered and composition sellers. Certain penalties are proposed in cases where the seller was either over the limits prescribed or is making inter-state supplies despite being under composition. This will call for all platforms to “upgrade” their systems and processes to be able to capture this information and monitor it real-time.

In our view, as a part of the process of implementing the above provisions, the GST Council should address the following:

  • Tax Deducted at Source (TCS) and accumulation due to low rates – Current TCS rate is 1% and manufacturer and trader under composition scheme is also required to pay tax on 1% on entire sales. This is different for regular sellers who may be paying 12-18% tax. Therefore, the need for accuracy and timeliness of reporting by platforms would be critical for composition sellers to offset such TCS against their monthly liabilities. Any gap in compliance by the platform may trigger a negative cash flow impact on the seller. Therefore, the Council may consider reducing the TCS rate to 0.1% or such similar lower rate (as the objective is only to track transactions).
  • Access to data - It is envisaged that TCS return would include reporting of PAN based turnover of unregistered supplier on the portal. GSTN could consider grant of access of such details to the online platforms for them to be able to discharge the obligations under the new penal provisions. 

B. Expanding coverage of ‘online’ services  

With increased usage of Information technology as a medium of provision of services, Budget 2023 has proposed to widen the scope of the existing definition of Online Information and Database Access or Retrieval (‘OIDAR’) services.

Under GST, overseas OIDAR services provider is liable to register and pay GST on transactions with persons not using the service for furtherance of business.  For other cases, the receiving business is liable to pay GST under reverse charge principles.  Furthermore, services that are “essentially automated and involving minimal human intervention” were covered in the scope.

Budget proposes to alter both these aspects.  On the first one, the clause is proposed to be simplified to make the overseas provider liable in all cases where the buyer is unregistered for GST (instead of the vague term of use for furtherance of business).  This should bring more certainty for such providers to determine transactions where they are liable to pay.  GSTN provides data on registration status, which will be required to be captured by such providers to explain why taxes were not paid with respect to such buyers.

The second aspect is being amended to remove reference to the phrase quoted above. Therefore, once a service is provided “online”, even if there is human intervention, it is likely to be covered in the expanded scope.

This article is written by Divyesh Lapsiwala, Partner, Indirect Tax with contributions from Pratik Sampat, Director, Indirect Tax, EY India. 

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Budget 2023 changes may result in a two-fold impact – the former will require existing providers paying GST to realign their systems and processes to capture the right set of transactions on which GST should be paid. The latter would possibly bring in more service providers into the net, requiring them to register and comply with the GST provisions.

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By EY India

Multidisciplinary professional services organization

Related topics Tax Tax controversy E-commerce