Growth in the e-commerce world has catapulted exponentially, amidst the global pandemic. In India as well, with increased internet and smartphone usage in the urban and rural landscape, the e-commerce space has been fast growing and is poised to grow to $200 billion by 2026 according to industry studies.
E-commerce has changed the business landscape, fuelling consumption by providing direct access to end-consumers and creating new job opportunities.
What has truly complemented growth in this sector in India, is the pillar initiatives taken by the government on technology and digitisation, which has given rise to tremendous technological innovations, data analytics capabilities, new modes of digital payments/online wallets and the development of local logistics support.
In India, the tax and regulatory landscape has been evolving consistently and has undergone frequent changes to keep pace with this explosive growth that we are witnessing in the e-commerce space.
The e-commerce space has been closely monitored and scrutinised by tax regulators, with ever increasing requisitions on transactional data from e-commerce operators, with an object to protect consumer interest and that of brick-and-mortar retailers.
The intent largely seems to study the footprint of the e-commerce space on the tax and regulatory environment, due to its complex nature and multitude layers of transacting companies.
In line with the same, the government brought about various changes in the FDI norms, Income Tax provisions and GST laws.
These include embargo on inventory ownership by an e-commerce entity, regulations on trade practices (with prohibition on e-commerce entities on directly/indirectly influencing the sale prices of goods/ services), Tax Deducted at Source (TDS) obligations by e-commerce operators and Tax Collected at Source (TCS) by suppliers making sales online on e-commerce platforms, and separately TCS and 9(5) provisions under GST laws.
One of the most debated issues has been the impact of the Equalization Levy, introduced in the Union Budget 2020. A simple interpretation of the scope of Equalization Levy would mean that it would apply to transactions facilitated online, with its wide ambit, its impact includes those supplies for which the orders are placed through emails or on the ERP.
It is an industry expectation that a few qualifiers would be introduced to this levy, limiting its extent. Also, it would be important to clarify the fate of the Equalization Levy, on account of impending introduction of the BEPS Pillar 1 approach, in 2023.
On the indirect tax front, one of the biggest areas of concern has been the growing list of services on which the tax burden has been shifted from the actual supplier to the e-commerce operator.
This provision saddles e-commerce facilitators with additional tax compliances (in almost every state of India), and ultimately increases the cost of services, bringing disparity.
For instance, services of non-AC vehicles which are otherwise not taxable would be rendered taxable if booked through an online portal, and likewise services of restaurants. This would invite newer operational challenges such as carrying out partial billings, billing at differential rates, among others.
Other maladies affecting e-commerce operations, especially those located overseas, have been the application of TCS provisions and Online Information Database Access and Retrieval (OIDAR) liability.
Apart from state-wise registrations, TCS, e-commerce operators face major transaction data reconciliation issues. Separately OIDAR service providers, while expected to discharge the OIDAR tax liability, aren't provided any benefit of offsetting the benefit of Input Tax Credit (ITC) of expenses relating to Indian transactions.
Parallelly, there are provisions under Section 194-O of the Income Tax Act as well, that require e-commerce operators to withhold taxes at the rate of 1 per cent on payments made to sellers using the platform for selling goods/services.
These TDS provisions do not distinguish between resident and non-resident taxpayers. All these provisions prove to be quite cumbersome for operators and cast a heavy compliance burden.
The e-commerce businesses have been under the radar of the tax authorities through multiple enquiries/assessments/audits. Despite the distribution of taxpayers between central and state governments, lately, there have been many instances where taxpayers are subject to overlapping enquiries by the central tax as well as state tax offices.
From a regulatory standpoint, the Consumer Protection Act and Rules are to be amended and specific rules are sought to be introduced to regulate e-commerce entities in a stringent manner.
It is also understood that a specific e-commerce policy is to be released soon, that may lay down other nuances and regulations which would help in clearing a lot of issues.
It is the specific ask of the industry that specific guidelines be issued by the government, that clearly lay down contours for carrying out business by both e-commerce and brick and mortar world.
The e-commerce industry has been burdened with multiple tax compliances across both direct and indirect taxes and has also been facing constant business disruptions with what is an evolving tax and regulatory space.
In essence, the distinguishment between the e-commerce world and the brick-and-mortar world from the tax and regulatory perspective can stifle the growth of the e-commerce space.
(Amarjeet Singh, Partner and Head, Emerging Giants and Startups, KPMG India; Anshul Aggarwal, Partner, Indirect Tax, KPMG in India; and Shreya Tripathi contributed to this piece.)
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