Monday 22 December 2014

GST to give a boost e-commerce companies

The proposed national goods and services tax (GST) will give a big boost to the e-commerce sector. In the absence of specific tax laws for companies in this segment, many are battling various issues on this front.

A GST is expected to resolve many supply chain issues which impact this sector. “GST, when implemented, will lead to faster shipment and returns and lesser paperwork. Companies will also be able to execute more efficient supply chain strategies, with warehousing based on strategy rather than tax requirements (like octroi),” says Ashish Jhalani, founder, eTailing India & ISeB. With a uniform tax structure across India, he said, goods can be priced and margins calculated without worrying about where the product is finally shipping.

GST is a single tax regime, applicable across states, on the sale, manufacture and consumption of goods and services. Since a uniform tax regulation will apply, e-commerce companies (and those from other sectors) will not have to struggle with the country's complex regulatory structure.

Ambareesh Murthy, founder at Pepperfry.com, said, “The biggest benefit is transparency and simplification of tax. Each state has its own tax (now) and GST will lead to a common tax and ease in transportation of goods. It will make life easy for those who sell across the states.” GST will replace most indirect taxes with a single tax. It would have a dual structure — a central component, levied by the Centre, and a state component, levied by states.

At the central level, GST will subsume central excise duty, service tax and additional customs duties. At the states level, it will include value added tax (VAT), entertainment tax, luxury tax, lottery taxes and electricity duty. VAT, however, will be charged on each stage of value addition.

“GST will help free movement of goods across the states, without different taxes. Since the tax paid in previous state is treated as input credit, it will allow us to reach out anywhere in the country without a tax burden. It will bring in more efficiencies and reduce prices for customers,” said Rakesh Biyani, joint managing director, Future Retail.

The rollout is likely to simplify logistics for e-commerce companies. Also, the practice of minimising their tax liabilities by finding loopholes in existing sourcing, distribution and warehousing strategies will have to change.  “Many operational complexities will go away and customer experience will improve. A lot of pockets will get opened for delivery” said Praveen Sinha, co-founder, Jabong.com.

GST will also allow retailers to keep their items based on a transportation model than a taxation model. “GST will help reduce retailers' inventory levels and improve product availability, due to better efficiencies.

It will help e-commerce companies do business easily, since customers and their suppliers are based in different states,” said Kumar Gopalan, CEO, Retailers Association of India.

GST would also help address challenges such as the one faced by the Karnataka tax authorities, where concerns about alleged tax evasion by Amazon India were brought to the fore. Questions were raised about why Amazon and its sellers were paying no VAT for operating from the company’s warehousing facilities on the outskirts of Bengaluru. The situation might have been different if clear laws had been formulated for the e-commerce sector. The standoff is more a result of differences in interpretation of the vague laws by Amazon and the state tax authorities.

Jhalani explains that Amazon operates on a marketplace model and only provides a platform for buyers and sellers to transact -- it's not engaging in any selling directly. Thus, Amazon's reasoning was that it should not come under the purview of sales Tax or VAT. It gets a commission from sellers for facilitating sales and, thus, only service tax was applicable, it felt. On the other hand, its sellers, who were stocking their goods in Amazon’s warehousing facility, were designating it as “an additional place of business”, in contravention of the state’s VAT rules.

“The state tax authorities then ordered Amazon to discontinue selling some products from its Bengaluru warehouse, cancelling the licences of about 100 of its sellers supplying merchandise to that warehouse. Consequently, the company had no choice but to cancel many orders for those particular products and bear losses,” says Jhalani.

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