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Rajeev Dimri 1 BMR & Associates LLP
Rajeev Dimri is Leader, Indirect Tax, BMR & Associates LLP
The recently-passed Model GST Law aims to create a more amenable business environment for India. The law gives particular attention to the growing e-commerce sector, and the following article considers these changes, and what they will offer, and require of, taxpayers.
Goods and Services Tax (“GST”), anticipated to be the most powerful tax reform ever to take place in India, has the ability to alter the entire indirect tax environment for businesses in the country. With GST coming at a time when companies are largely moving towards embracing digital technology and having an online presence, it is imperative that the GST law specifically addresses various tax issues being presently faced by the e-commerce sector under the current tax regime. The existing tax laws are highly deficient when it comes to taxation of offerings in and through digital space. Be it taxation of electronic supplies, intangibles or online intermediaries, the arena is filled with disputes. The greatest challenge being faced by various e-commerce players presently is the levy of taxes on behalf of the suppliers operating through their platform. This goes against the overall spirit of these businesses who intend to operate only a channel connecting various suppliers and recipients and not supply goods/services on their own account. The debate on this aspect between various e-commerce players and the tax department seems to be far from its conclusion under the present regime.
The Model GST Law, which lays down the broad contours of the GST framework, was released on June 14, 2016. On the first reading of the Model GST law itself, one can notice that a separate chapter has been dedicated to e-commerce. This clearly brings out the inclination of the Government towards recognizing the latest emerging business models and according them special status for taxation purposes. This should hopefully bring in an era of clarity for e-commerce businesses as well as tax department involved in a constant tussle with each other due to inadequate taxation laws.
The e-commerce chapter under the Model GST Law defines certain key terms including “aggregator” and “e-commerce operator.” “Aggregator” has been defined as a person who owns an electronic platform by means of an application/communication device and enables a potential customer to connect with the service provider under the brand name of the aggregator. This definition seems to include various app-based services within its ambit where services are provided by individual service providers under the brand name of an “aggregator.” While the definition of aggregator largely remains same as the one existing in the present law, for the purpose of the GST law, the aggregator has been deemed to be the supplier of the service. This is in slight contrast to the present provisions, which make an “aggregator” liable to pay tax as a service recipient under the reverse charge mechanism. This can be seen as a positive move as it should address the issue of blockage of input tax credits for the aggregator, which could not have been utilized for payment of tax under the reverse charge mechanism.
Similarly, “e-commerce operator” has been defined as every person who directly or indirectly owns or manages an electronic platform that is engaged in facilitating the supply of any goods or services but does not include a person who supplies such goods and services on its own behalf. This definition seeks to cover various e-commerce players through which goods/ services are supplied. The purpose of providing a separate definition for aggregator and e-commerce operator appears to be for prescribing different tax compliances for an aggregator and e-commerce operator. While an aggregator is deemed to be the supplier of service, an electronic operator has to collect tax on behalf of the original supplier of goods/ services. The thin line drawn between an aggregator and e-commerce operator for services would be whether the services of the third parties are being rendered under the brand name of the online portal. This is likely to lead to ambiguity for stakeholders (third party service providers and the online platform) in determining their respective tax obligations. The confusion could further spill over to a variety of sectors relatively novel to the Indian economy, including online travel agents, marketplaces offering specialized/ professional services and online sellers of digital products.
An important thing to note is that the present provisions for allowing the appointment of an agent in India by an aggregator which does not have a presence in India does not seem to find a place in the Model GST law. Similarly, under the present law, e-commerce marketplaces having no presence in India are not required to obtain any registration in India. However, the lack of clarity from this aspect of the Model GST law has left many wondering whether aggregators and e-commerce players operating outside India would need to register themselves in India under the GST regime merely for taxation purposes. This inference, if true, could prove to be highly regressive for various overseas operators who may need to re-look at their overall business strategy simply to comply with tax provisions. Besides, this could open the room for various tax and non-tax litigations for such overseas operators.
The provisions for an e-commerce operator require it to collect tax at a rate to be notified on behalf of the supplier of goods/services at the time of making the payment to them. Credit of such payment would be available to the supplier towards discharging its output GST liability. Introducing such concept for e-commerce operators clearly shows the intention of the Government to make online intermediaries accountable for supplies made through their platform. While the rationale for this move, i.e. to achieve improved tax compliance, is appreciated, it would significantly increase the compliance requirements for e-commerce operators. Further, this would also put the suppliers supplying goods/ services through an e-commerce operators at a disadvantage vis-à-vis regular brick-and-mortar suppliers, which is against the overall spirit of GST.
The biggest challenge that would arise for e-commerce operators would be to determine the place of supply for various suppliers operating through their platform. While the Model GST Law provides for the principles for determining the relevant State for payment of tax, one cannot rule out the possibility of ambiguities and multiple interpretations with respect to the place of supply. This could lead to a situation where tax has been collected and deposited by an e-commerce operator in a State other than the State where tax is paid by the main supplier. An associated issue would also be to determine the manner for depositing the tax collected by an e-commerce operator for suppliers having presence in multiple States. This could possibly create a need for the e-commerce operator to register in each State where its suppliers are located.
While it would be premature to conclude on any of the aforementioned aspects, the Government must be mindful of the possible anomalies while coming up with various rules and regulations for implementing the Model GST Law. Provisions must also be built to safeguard interests of small scale suppliers who may not have any tax liability or may be operating under the composition scheme. The provisions for an e-commerce operator should not lead to a scenario wherein suppliers are discouraged from operating through e-commerce models on account of tax challenges. This would be against the spirit of GST which is being seen as a tax regime which is aligned with various business structures and is expected to bring in a regime wherein businesses can operate purely on commercial factors rather than tax considerations.
Against the backdrop of India moving towards becoming ‘digital India’, the Government finally seems to have given special recognition to the e-commerce sector under the upcoming GST framework. While it is critical to ensure blocking of avenues amenable to tax leakage, the compliance mechanism to this end should not be so stringent so as to defy the overall policy intent for providing a thrust to online businesses. The Government must engage in regular discussions with e-commerce players before finalizing the law to find a middle path for achieving the intended objectives of all stakeholders involved.
Rajeev Dimri is Leader, Indirect Tax, BMR & Associates LLP. He can be contacted at firstname.lastname@example.org.NOTES
1 This article was prepared with inputs from Poonam Harjani and Nimisha Chaudhary.
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