GST law poses multiple challenges for e-commerce firms

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New Delhi: The finance ministry on Tuesday released the draft goods and services tax (GST) legislation that brings all e-commerce transactions under the ambit of the proposed levy. While the proposed regime might address the tax issues e-commerce companies have been facing in different states, it comes with its own set of problems.

If you are an e-commerce platform or a seller listed on a platform, here is what you need to know about the draft GST and how it could impact you.

Compliance and accounting burden

According to the draft bill, the e-commerce platform will be liable to collect TCS (tax collected at source) on the supplies of goods and services made by the supplier. It will be the responsibility of e-commerce firm to file monthly and annual returns. Also, the supplies reported by the e-commerce firm will be matched with the details given by the supplier in his return for outward supplies and in case of a mismatch, the output liability of the vendor will be re-determined

Impact: This is likely to be an accounting nightmare for e-commerce firms. While a uniform tax law will help e-commerce firms offset the tax against output tax, this is expected to be an additional burden on e-commerce firms such as Amazon, Flipkart, Snapdeal and ShopClues.

“Until now the tax liability was of the seller and not of e-commerce platforms but now the government will pass on the responsibility to the e-commerce operator. This means the cost of compliance will go up for companies,” said Himanshu Sinha, partner at law firm Trilegal.

Working capital issues for small sellers

While the GST has proposed to exempt small businesses with annual turnover of less than Rs.10 lakh, it expects e-commerce platforms to collect tax on every transaction no matter how small the seller might be.

Impact: This essentially means that a small seller on the platform will invariably end up paying tax and would later apply for a refund. This could be a grave issue for small and medium businesses that work on very tight working capital.

“The implementation of GST will enable millions of consumers across the country to have access to quality products at affordable rates. However, a specific proposal in the draft law relating to tax collection at source will prove to be detrimental to lakhs of small and medium sellers who do business on e-commerce platforms. This clause, which is not applicable to offline sellers, will hurt the working capital requirement for these sellers as they work on small margins to provide affordable rates to consumers,” said a Flipkart spokesperson.

Accounting for cash on delivery, returns and cancelled orders to impact cash flows

E-commerce in India has a return or cancellation rate of about 15-18%. Also, more than two-third of the transactions in the country are still on cash on delivery (COD) and the cash reconciliation for e-commerce firms happens about 7-15 days later.

Impact: Deducting tax at source would require e-commerce firms to bear the tax amount from their own capital and later seek refund from the government in case of returns and cancellations.

“TCS can be a major cash flow disadvantage for e-commerce firms especially in the case of cash on delivery or orders being rejected later. E-commerce firms will have to plan their accounting and cash reconciliation cycles accordingly,” said Nihal Kothari, partner at law firm Khaitan & Co.

Disadvantage on discounts and freebies

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 creating additional burden on the sellers.

Also, in case an e-commerce firm decides to sell an item on discount it will have to pay the tax on the price it has purchased the goods from the supplier, he