At issue is Tax Collection at Source (TCS), proposed in the Goods and Services Tax (GST) Model Law. The proposal mandates online marketplaces to deduct two per cent of the amount payable to sellers and remit it to the government. Sellers can claim credit against the TCS at a later point. E-commerce companies, however, have several issues with this.
One primary issue is that it skews the playing field towards traditional retail. The reason: TCS is applicable only to online marketplaces and digital intermediaries. Traditional retail isn't covered under this Model Law. Even within e-commerce, TCS is targeted only at marketplaces and not at inventory-based online businesses. This rationale for "selective selection" has been confounding many. It would lock up the seller's capital - mostly SMEs - and increase regulatory burden on the marketplaces. Sachin Bansal calculates that about Rs 400 crore of working capital would get locked up every year at the current scale. The implication is serious: it would deter SME sellers from migrating to the e-commerce platform or even adopting digital as the preferred way to do business. This, by extension, will slow down the e-tailing sector. That helps traditional retail. In fact, the "selective selection" of marketplaces for TCS has led some experts to credit offline retailers with smart lobbying. The objective of such a move is visibly to bring more SMEs within the tax bracket or make them tax compliant. However, e-commerce transactions, because its digital, have a clearer audit trail, all executed through banking channels. The chances of tax avoidance are higher in physical retail.
At the presser, Kunal Bahl, Co-founder of Snapdeal, pointed out that e-commerce was at the confluence of many government drives - Make in India (e-tailers sell products manufactured in the country), Start-up India (e-commerce companies are all start-ups), Digital India (cash-less transactions), and Skill India (e-commerce players have been skilling bottom-of-the-pyramid for jobs such as delivery). If TCS upsets the growth of the $23 billion e-tailing industry, many of the government's flagship schemes can potentially take a step backwards. Time for a re-think.