Simplifying Tax for C.A's and Taxpayers
GST and Online Marketplaces

GST and Online Marketplaces

India is gearing up to introduce a comprehensive indirect tax regime under the goods and services tax (GST). Since the introduction of the GST regime will affect the very fundamentals of how business is carried out in India, it is essential to reflect upon the impact on online marketplaces.

E-commerce, in simple terms, can be described as the conduct of any commercial activity using the internet as a medium. In India, the scope of e-commerce is consistently expanding. Given the norms in existence pertaining to FDI and other regulatory aspects here, the online marketplace business model has witnessed the most of the success.

Whether goods supplied or services rendered qualify under GST definition of goods or services?

First of all, we need to determine to whether the goods supplied or services rendered via marketplace are covered under GST.  The term “goods” has been defined as “every kind of movable property other than actionable claim and money but includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract of supply”.

Further, the GST Bill defines ‘services’ as ‘Services mean anything other than goods.’ Explanation to definition provides that Services include intangible property and actionable claim but does not include money.

Hence, both the terms will have a very wide ambit and may include various transactions. In each case, it will be determined whether a transaction qualifies under goods or services.

Here we would like to draw attention to the concept called digital content. Digital content such as software, e-books and music albums is often sold over the Internet. Generally, once this content is purchased from the portal, it can be accessed by the customer from any device by simply downloading after entering the login credentials. This mode of delivery is peculiar to the e-commerce industry. In current regime, the definitions of goods and services overlap in case of digital content. In GST too, a clear classification of digital content is warranted.

How to determine whether online marketplace is covered under GST?

There are three important terms defined in Model GST law which forms the crux for determining e-commerce taxability under GST. These are:

1. Electronic commerce (E-commerce)

2. E-Commerce Operator

3. Aggregator

Have a look at their definitions.

As per Section 43B of Model GST Law, ‘electronic commerce’ shall mean:

  • the supply or receipt of goods and / or services, or transmitting of funds or data,
  • over an electronic network, primarily the internet,
  • by using any of the applications that rely on the internet, like but not limited to e-mail, instant messaging, shopping carts, Web services, Universal Description, Discovery and Integration (UDDI), File Transfer Protocol (FTP), and Electronic Data Interchange (EDI),
  • whether or not the payment is conducted online and
  • whether or not the ultimate delivery of the goods and/or services is done by the operator;

E-commerce operator means:

  • every person
  • who, directly or indirectly, owns, operates or manages an electronic platform
  • that is engaged in facilitating the supply of any goods and/or services or in providing any information or any other services incidental to or in connection there with
  • but shall not include persons engaged in supply of such goods and/or services on their own behalf.

Aggregator has been defined as:

  • a person,
  • who owns and manages an electronic platform, and
  • by means of the application and a communication device,
  • enables a potential customer
  • to connect with the persons providing service of a particular kind
  • under the brand name or trade name of the said aggregator.

To help us understand it better, we could rely on following diagram:

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Important Note:

The above diagram is merely a pictorial representation of provisions contained in Model GST Law.  Keeping in mind the fact that the e-commerce activities can be modeled in various manners, there could many overlapping points in definition. It is important to exercise due caution while classifying persons either as aggregators or e-commerce operators as the nature of responsibilities casted under the law for either of the categories are very different.

E-commerce operators and aggregators are to be compulsorily registered under GST irrespective of turnover as per Section 19 and Schedule III of Model GST Law and accordingly falls within definition of taxable person.

Even the persons supplying goods and /or services, other than branded services, through electronic commerce operator are also to be compulsorily registered under GST irrespective of turnover threshold.  

E-commerce companies other than e-commerce operators and aggregators have to seek registration based on turnover limit.

It is important for to determine the place of business for such operators. Since they provide an electronic platform, it would be interesting to know that in which State such e-commerce operators would require to register. In absence of clear cut provision, “type of person” concept should be used.  If such e-com’s are registered as company, partnership firm under the respective Acts, then GST registration shall be taken in the State where it is registered under various Acts (Partnership Act, Companies Act). If it is not registered under such acts and want to conduct business as an individual (sole proprietor), then GST registration shall be taken in the State where he opens a bank account for transaction purpose.

For e-commerce operators working on fulfillment model, registration will have to be obtained for all states where it has warehouses or godowns by virtue of definition of place of business.

Deemed supply of service for aggregators

The supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be treated as deemed supply of service as per Section 3(4). Accordingly an aggregator has to pay tax on the service supplied on deemed basis.

Once it is determined whether transaction qualifies for tax under GST, the next step is to determine the place of supply.

Determining place of supply

  • Place of supply of goods

The place of supply of goods as per Section 5 of Integrated Goods and Services Tax Act, 2016 shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient. Where there is no movement of goods, place of supply shall be place where goods are located at the time of delivery to the receiver.

  • Place of supply of services

The terms used in the IGST Act are registered taxpayers and non-registered taxpayers. The presumption in case of supplies to registered person is the location of such person. Since the recipient is registered, address of recipient is always there and the same can be taken as proxy for place of supply.

In respect of unregistered recipients, the usual place of supply is location of recipient. However in many cases, the address of recipient is not available, in such cases, location of the supplier of services is taken as proxy for place of supply. Though there are some exceptions to this rule.

The location of service recipient or service provider could be registered place of business, any fixed establishment or usual place of residence depending on circumstances. There is a complexity over here as there could be multiple place of businesses registered for both provider and receiver.

Similarly, other proxies can be used such as the place where the activity takes place or place of performance or the place where it is consumed; or the place/person to which actual benefit flows, which gives more appropriate result than others for determining the place of supply,

Determining whether transaction qualifies as inter-state or intra-state

The model law provides that the supply of goods or services will be inter-state where location of supplier and place of supply are in different states.

Point of taxation

Point of taxation refers to when the tax has to be paid in respect of a transaction.

  • Point of taxation for the services rendered by the e-commerce marketplace company should be the date of invoice raised or date of payment received, whichever is earlier.
  • Point of taxation for the vendors/retail companies selling goods through the online portal should be the date of invoice.

Valuation

  • The ‘transaction value’ is taken as the value of goods/services.
  • Most e-commerce firms are known for heavy discounting and subsidizing of products or offering free goods with specific purchases. Under GST, freebies are expected to be taxed.
  • Discounts given after effecting supply are included in the ‘transaction value’ only in cases where such post-sale discount, as per agreement, is known at or before the time of supply, and specifically linked to relevant invoices. Cash backs, promo codes would be in the nature of post supply discounts.

Responsibility to collect tax

Section 43C casts an obligation on e-commerce operators to collect tax at source (out of the total amount payable to the supplier) at the time of credit of such amount or at the time of payment, whichever is earlier. The rate is yet to be notified on recommendation of GST Council. Procedural aspects include:

  • Such withheld amount is to be deposited by such E-Commerce Operator to the appropriate GST account by the 10th of the next month.
  • Supplier is required to deposit tax in case of mismatches between information forwarded by e-commerce operator and the returns filed by the supplier.
  • Any amount collected and paid to the Govt. Account shall be deemed to be a payment of tax on behalf of the concerned supplier and the supplier shall claim credit, in his electronic cash ledger, of the this amount.

It appears that GST will still need to be collected at source by e-commerce operators from small suppliers, even when their turnover does not exceed the threshold exemption. Further, it is not clear whether refund of tax paid would thereafter be available to small suppliers.

No carve-out has been made for certain electronic commerce operators who do not receive any payment or who do not act as a payment pass-through, such as Quickr or Olx. Appears to be a drafting anomaly.

Returns:

  • Every e-commerce operator has to furnish the monthly return GSTR-3.
  • In addition to GSTR-3, every operator shall furnish a statement electronically of outward supplies and amounts collected in GSTR-8 within 10 days after the end of the calendar month.
  • GSTR-8 will be available to concerned person in GSTR-2A for auto-populating the data in the portal

Treatment of stock transfers

Intra-state and inter-state stock transfers, between branches or warehouses of a single e-commerce entity, would be deemed to be supplies, subject to GST as specified transactions without consideration also falls within ambit of supply.

Impact on E-commerce:

ModelsMeaningExisting tax structureProposed tax structure
Inventory based modelModel where the e-commerce companies buy goods from different vendors and stock it and then sell to the ultimate customer.Registration under VATGST Registration in each State in which they are operating.
Entry tax to be subsumed
Market place modelModel where E-commerce companies provide an electronic platform to different vendors all over the country to sell their products. Here the responsibility of warehousing and delivering the goods lies on the vendor.Centralized registration under Service tax Act for “Information technology Services and Other associated services “
Service tax on Commission charged from vendors
Place of business to obtain registration not clearly laid out.

GST on commission charged from vendors.

Tax to be collected at source from payments to be made to vendors
Fulfillment modelModel where the e-com's in addition to providing electronic portal to the vendor, also provides the services of storing and delivery of goods to vendors. Here, the e-com's fulfil the orders of buyers by making delivery to them from the stock of goods of various vendors stored by them in their warehouses or go-downs.Service tax on the commission charges, storage and delivery services.
VAT Angle disputed
GST on the commission charges, storage and delivery services.
Each warehouse and godown to be registered.
Entry tax to be subsumed
AggregatorsModel where a service provider connects with the customer using an electronic platform by means of the application and a communication device, under the brand name or trade name of the said aggregator.Payment of service tax under reverse chargeConcept of deemed supply. Aggregator is liable to register and pay GST as a 'supplier of service' as against payment under reverse charge under pre-GST regime

Other definitions of terms used in this article:

  • brand name or trade name’ means, a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as an invented word or writing, or a symbol, monogram, logo, label, signature, which is used for the purpose of indicating, or so as to indicate a connection, in the course of trade, between a service and some other person using the name or mark with or without any indication of the identity of that person;
  • branded Services’ means services which are supplied by an electronic commerce operator under its own brand name or trade name, whether registered or not;

Hope you find this article useful. Post in your queries, if any

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