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FinTech Consulting Services
Leveraging our FinTech Consulting experience, we employ our proven approach in process reviews, tech risk management, and third-party audits for Indian financial services clients.
With an envisaged compound annual growth rate (CAGR), the Indian e-commerce market has witnessed a remarkable boom fueled by several factors, such as increased internet penetration, inflow of foreign direct investment, technological advancements, and innovative practices. This transformation has led to a revolutionary shift in shopping behaviour, transitioning the traditional retail landscape into a thriving digital marketplace. The development and success of e-commerce in India are vital components in fostering a cashless economy, thereby supporting the ‘Digital India’ and ‘Startup India’ initiatives of the Government of India (GOI).
In tandem with the exponential growth in e-commerce revenue and collaboration between online players and retailers, significant challenges have emerged for the GOI in protecting consumers from unfair trade practices, regulating data collection on platforms, fostering healthy competition, and preventing tax evasion. Corollary, the GOI has proactively implemented various laws and regulations, including Goods and Services Tax (GST), to govern e-commerce activities to establish a transparent and seamless ecosystem. The subsequent paragraphs will delve into the essential aspects of the e-commerce industry and corresponding GST regulations.
Statutory interpretation and legal maxim
The electronic commerce operator (ECO), as per the provisions laid down under GST, means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce. Under the framework of foreign exchange management legislation, the landscape of electronic commerce has been bifurcated into two distinct models, namely the inventory-based model and the marketplace model. The former model entails the ECO’s ownership of inventory of goods and services, with direct sales to consumers. Conversely, the ECO is an intermediary in the marketplace model, orchestrating transactional interactions between buyers and sellers.
Under the first model, the ECO, functioning as a supplier, is legally obligated to collect and remit GST on taxable supplies undertaken. In contrast, under the marketplace model, ECO is responsible for collecting TCS on taxable supplies facilitated through its platform while concurrently levying GST on platform-related services extended directly to merchants. Broadly speaking, the key GST regulations for e-commerce transactions under the marketplace model may be categorised into two distinct pillars.
Analogy between both the pillars
| Particulars | Pillar 1 Section 9(5) of the CGST Act |
Pillar 2 Section 52 of the CGST Act |
| Coverage |
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| Collection of TCS / Tax liability |
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| Key registration requirements |
For ECO
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For ECO
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For supplier/s
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For supplier/s
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| Returns and reporting** |
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| **GOI has introduced certain changes by notifying new tables (out of which few are yet to be made live) for reporting e-commerce transactions. Such detailed reporting by actual suppliers and ECOs is expected to simplify compliances and ensure simultaneous reconciliations. | ||
Navigating the industry complexities
Owing to novel and complex business models and transactions, the e-commerce industry is encountering formidable challenges with the ever-evolving technological landscape and shrinking margins. ECOs, in their pursuit of enticing consumers, commonly employ e-gifting solutions and incentive mechanisms such as reward points or cashback, which poses significant concerns regarding valuation and reporting mechanisms under GST. To illustrate, let’s consider an example where a supply has been undertaken through the ECO platform, encompassing the following specifications:
| Particulars | Specified services u/s 9(5) | Other taxable supplies |
| Taxable value of supply | INR 1,000 | INR 1,000 |
| Discount offered to a customer by ECO out of its own pocket (at the time of undertaking supply) | INR 100 | INR 100 |
| Amount to be collected by ECO from the customer | INR 900 | INR 900 |
Regarding the scenarios mentioned above, a couple of questions may arise - First, what would be the taxable value of the supply and the corresponding reporting mechanism under GST? and b) Second, should the discounts offered by an ECO be considered while calculating the TCS amount? Presently, the industry tends to consider the collectible value of consideration from the customer as the taxable value for reporting and TCS calculation purposes.
Intriguingly, same view was held in advance ruling sought by M/s Gensol Ventures Private Limited before the Gujarat AAR for valuation of passenger transport services provided through a digital platform, wherein discounts were proffered to consumers directly by an ECO. The authority ruled that the supply value should be considered as net of discount, and the applicant would be responsible for discharging GST as it steps into shoes of the actual drivers.
Another ambiguity the industry encounters is whether mere provision of IT infrastructure/ platform services would fall under the ambit of e-commerce activity. Several taxpayers have sought clarification through advance rulings for their respective business models to establish a precise tax position in this aspect. In the case of M/s OPTA Cabs Private Limited , the Karnataka Appellate Authority for Advance Ruling (AAAR) has upheld the view of AAR that the booking of cabs is the initial activity facilitating supply of services. Since ECO further navigated the ride through its IT platform, it would be liable to discharge the tax liability.
On the other hand, in the matter of M/s Multi-Verse Technologies Private Limited , the Karnataka AAR observed that a computer application developed by the applicant merely facilitates the connection between drivers and passengers but does not have control/ details w.r.t actual provision of services. The AAR held that the applicant is not liable to discharge tax liability on behalf of the actual supplier though being classified as an ECO. The said authority reiterated similar views regarding M/s Humble Mobile Solutions Private Limited.
Besides the aforementioned challenges and mandatory heightened compliance and comprehensive reconciliations, other key ambiguities prevailing in the industry include TCS implications on cross-border e-commerce transactions, TCS adjustments on goods returned to ECOs/ actual suppliers, and GST document's issuance for the shipment of returned goods.
Conclusion
The remarkable growth and immense potential of India’s digital economy have spurred the government’s progressive approach towards indirect tax reforms, as evidenced by the proposals introduced by the Finance Act, 2023. These proposals, though yet to be officially notified, include widening the scope of the composition scheme to include persons supplying goods through an ECO and introducing punitive provisions for e-commerce operations and reporting.
Albeit businesses in the online space are still encountering certain challenges across various fronts, the overall implementation of GST on the e-commerce industry is commendable. Moreover, the GOI consistently strives to upgrade the legislative framework to accommodate the rapidly evolving and dynamic e-commerce landscape. These ongoing endeavours would undeniably contribute to the progress and advancement of the Indian e-commerce industry. However, to put the prevailing ambiguities at rest and ease the compliances for e-commerce transactions, the GOI may consider issuing suitable clarifications addressing the above aspects.