GST Bill to be bittersweet for e-commerce firms; here’s why

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GST (Goods and Services Tax) is finally here, years after it was first mooted – but hold the celebrations, since it may take a year or more before it gets implemented. Plenty of regulatory processes still remain. More importantly, no one really knows the actual tax rate that will be applied; all discussions and debates on possible impact on pricing of items are mere conjecture. So bury any thoughts that prices on specific items will change tomorrow morning.

The current system of sales tax in India is dual-layered and is determined based on the location of sourcing and consumption of physical goods. If a retailer purchases an appliance from a brand owner in State A and retails it to a consumer in the same state, then LST (local sales tax) at a pre-fixed rate will apply. LST will get charged twice, first when the retailer buys his stock and second when the consumer buys the appliance from this retailer in the form of VAT (value added tax). To prevent double taxation, the retailer can claim back the tax he paid while buying stock, which means only the consumer paid the VAT on the appliance.

If the same retailer buys stock in State A but retails it in State B, then CST (central sales tax) at a pre-fixed rate gets applied. Since each state collects tax just once, there are no benefits that can be claimed back but taxes have been applied twice. This is the reason why most physical goods in India get stock transferred so that stock purchase and retail consumption happen intra-state.

Further, most states currently have the freedom to add additional levies, entry taxes and surcharges – making the entire system complex and ad hoc. Several states have checkposts which are primarily meant to harass incoming truckers with demands for obtuse documentation, thus opening up windows for corruption.

GST promises to remove all these in a single stroke by treating India as a single market, thus allowing easy movement of goods all over the nation, saving time and reducing prices of most items in the hands of consumers.

GST will impact the e-commerce industry in the following manner:

Prices of most items are expected to come down (although we have to wait and watch). Lower prices may push up online sales, although this is an overarching impact and nothing to do with e-commerce. Movement of physical goods across states will become faster and less cumbersome thanks to simpler documentation. This will allow inventory based e-commerce companies to set up warehouses based purely on logistics instead of tax saving considerations and deliveries to customers will get faster. This is a clear benefit.

According to the GST Bill in its current form, e-commerce companies will be responsible for collecting and remitting taxes on behalf of all their sellers and merchants. This could become cumbersome and time consuming, especially for marketplaces who host thousands of sellers on their platform.

Marketplaces provide a service to sellers who sell on their platform and this service is liable for service tax. This rate is likely to go up, thus pushing up costs.

In summary, my view is that apart from easier transportation of goods across India, GST will have fewer benefits but create more administrative pains for e-commerce companies.