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On the 1^st of July, India introduced one of the biggest tax reforms – the Goods and Services Tax (GST) Bill. The consumer paid around 25-30% through indirect taxes on a product according to the previous tax convention. GST comes at a time when India is economically growing. A tax reform, especially one of this magnitude, will have a serious impact on all businesses and stakeholders alike.

Under GST, India is set to become a national market with a unified tax scheme. One of the biggest fledgling industries, driven by a marketplace model, is the e-commerce industry which will undergo serious reforms in compliance with the country’s new tax scheme.

What is the GST and how does the government collect it?

The Goods and Services Tax is aimed at eradicating all indirect taxes like excise duty, VAT, Service Tax, etc. The bill brings the entire country under one tax bracket and applies four tiers of taxes – 5%, 12%, 18% and 28%.

Taxes on everyday items have been kept low to keep inflation in check and benefit the end consumer the most. Fast moving consumer goods have been kept under the tax bracket of 12% while taxes on ultra-luxurious items, sin goods, etc. have been kept under the higher bracket of 28%. At this point of time, electricity, alcohol, and fuel have been excluded from the list of taxable items that come under GST.

The passed bill segments GST to be collected at two levels – and State. India is a federal country and to maintain fiscal federalism, it calls for the tax to be levied at both the levels. However, with the introduction of the Goods and Services Tax, indirect taxes have been completely eradicated. This move helps in improving fiscal transparency on both levels of governance.

Example for CGST, SGST & IGST

GST will be applicable to both – interstate and intra-state transactions. To understand how to let us hypothetically consider two businesses in the same state – A and B. If the CGST (Central GST) and SGST (State GST) were 9% each, then for an online selling of items worth Rs. 100 to Business B, Business A would have to pay a CGST amounting to Rs. 9 to the Central Government and SGST amounting to Rs. 9 to the State Government.

However, if these businesses were in two different states, Integrated Goods and Service Tax (IGST) would be applicable which would amount to 18%. IGST is collected directly by the Central Government.

Is the Goods and Services Tax any good for E-Commerce?

While the government has allowed Foreign Direct Investments (FDIs) to bolster the e-commerce industry, GST might tighten the leash on the way they work. GST calls for mandatory compliance with the government rules. Some of the pull-backs for E-Commerce businesses due to the GST regime are as under:

1. E-Commerce businesses need to register with the government and get themselves GST ready as soon as possible with new ERP infrastructure or a new system in place to be able to calculate interstate and intra-state taxes.
2. Online shopping trends are set to change with taxes levied on stored items in the warehouse.
3. GST also introduces the TCS mechanism – Tax Collection at Source – under which, e-commerce businesses will have to deduct 1% tax out of the net value of taxable supplies. This is to be deposited directly to the government.
4. The capital costs for e-commerce players are also likely to increase because policies for Cash on Delivery (COD), Returns and Cancellations of orders have not been taken under due consideration while creating the reform. The businesses will already have paid taxes on these transactions and reconciliation for these take place in a week or two. This increases the capital costs for SMEs drastically, and all E-Commerce players in general.
5. Operators will have to manage accounts more carefully and in accordance with the new GST regime. Any mismatch in inventories and accounts will be liable to be paid via taxes and interest.

With initial drawbacks of having to adjust to a sudden change in tax regime, E-Commerce industry is set to reap the most benefits out of the new transparent tax reform. There’s some relief for E-Commerce Industry with the following points helping them grow:

1. It helps sellers who have warehouses across the country in many states, and sell their goods in many states. Warehousing is going to be much easier for e-commerce players.
2. The previous system was a complex multi-tiered system with taxes levied at each stage. GST brings a single tax scheme which helps in the transport of goods and ultimately brings costs down for the logistics segment.
3. Supply chain management for e-commerce players is expected to be less tedious with much less paperwork needed.
4. Web ordering and shipping approaches are likely to become more consumer-centric against the previous trend of warehouse-centric approaches.
5. With the cascaded taxes out of the picture, GST is sure to benefit all stakeholders in the long run. Businesses need only maintain three accounts: CGST, SGST, and IGST.

To Conclude

With the nation dissolving into one single market, the reaction is bipolar across economists. Some vehemently oppose it, while some are applauding the bold move. Whichever the case might be, it is too soon to judge whether GST is entirely good or bad for the e-commerce industry.

Foreign Direct Investments are growing by the day. With a simpler tax structure in place and easier entry, GST opens up new markets for all e-tailers. While SMEs are expected to comply with GST rules, they can apply for a refund later. GST puts into consideration a long-term higher output and outs tax evaders. E-Commerce industries need to be GST ready with a stronger than ever system in place to file their GST returns – every month and annually. The government is promising an automated system for easier filings to make the transition easier for businesses.

With no fixed outcome of the implications of GST on the e-commerce trade as yet, it sure has unsettled a lot of big players in the market. Patience is the key when it comes to reforming and we’re all waiting to see how this reform turns out to be.