The long-awaited Goods & Services Tax (GST) Law, which was expected to resolve the tax issues faced by online marketplaces, could end up increasing compliance costs for them and also create working capital issues for sellers on their platform.
The proposed “Model GST Law,” which awaits legislative clearance, says that online marketplaces will have to deduct taxes directly on the total sales made by merchants on their platforms and pay it to the government. Till now, online marketplaces passed on the payments made by customers to sellers after deducting their commissions and fees (such as for logistics or advertisement.)
Tax experts and online marketplaces feel that this will put the burden of compliance and administration on the ecommerce companies, which may hurt both their and sellers’ margins.
While Flipkart, India’s largest online marketplace, welcomed the new law, it also said that the provisions would put sellers on its platform at a disadvantage as compared to brick-and-mortar retailers.
“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 ecommerce 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,” Flipkart said in an emailed statement.
Players like Shopclues, which is valued over $1 billion and has 5 lakh registered merchants, are closely watching the roll out and execution of the policy. “We are cautiously optimistic about it, especially in our context as the current draft does not address needs of marketplaces clearly,” said Radhika Aggarwal, chief business officer at ShopClues.
“Unless the government puts a robust digital infrastructure in place, compliance will put undue pressure on small businesses and us. We also really hope that statelevel entry taxes and octroi taxes will be abolished enabling SMEs to service consumers from across their state more efficiently.”
Online marketplaces have been waiting for the GST law to help them resolve tax conflicts with various states like Uttar Pradesh, Karnataka and Gujarat who were coming up with new laws to tax online sales. Players like Flipkart, Snapdeal and Amazon had stopped selling products worth over Rs 5,000 in UP owing to tax issues with the government.
But under GST, tax collected will be paid to the consuming states by the government. The GST law is likely to bring online marketplaces, including those selling services, under a tigher tax net.
“If the merchant sells goods directly to the consumer, and no one declares it, there is a greater threat of evasion in ecommerce transactions,” said Sachin Menon, partner and head of indirect tax at KPMG India, who said this provision has been introduced to make the law foolproof. Torrey Smith JerseyShare This