1% tax at source under GST likely for online sellers

The Centre and states are likely to each impose a 0.5 per cent tax collected at source on sellers of products on e-commerce websites such as Flipkart and Amazon under the goods and services tax (GST) regime. 

This proposal would be taken up at the two-day meeting of the GST Council, starting Thursday in Srinagar. The tax will be collected by the e-commerce marketplaces: They will deduct 1 per cent while paying the sellers.

E-commerce players had earlier opposed a provision in the GST law to impose a 2 per cent tax — 1 per cent by the Centre and states each — deducted at source. The new indirect tax regime is expected to be rolled out on July 1.

“The tax collected at source will only help trace who is doing the transaction through an e-commerce portal. It is a measure to make such portals accountable,” said a senior government official, adding the tax could also be zero but states were not in favour of that. The model GST law, approved by the Council, provides for up to 1 per cent tax collected at source. The final levy needs to be approved by the Council.

The Integrated GST law has a provision for up to 2 per cent tax collected at source for inter-state transfers. Industry has opposed this, claiming it would result in locking up capital and dissuading companies from selling through online portals. E-commerce companies also need to file returns on the tax collected at source. If consumers return goods, the tax will not be collected. The model GST law has defined e-commerce as supply of goods or services, including digital products, through electronic networks.

People who own, operate or manage a digital or electronic facility or platform for electronic commerce are defined as “electronic commerce operators”.

For the government, the tax collected at source will help check tax evasion by enabling collection and information at source.  However according to the industry, it will suppress cash flow, as they already operate under thin margins. Flipkart in March said around Rs 400 crore of working capital would get locked up annually. 

“Ideally, tax collected at source should not be high under the GST as it might affect the working capital of e-commerce suppliers. Since the purpose of the tax is to ensure compliance, a 0.5 per cent central GST and state GST — or even lower — should suffice,” said Pratik Jain, leader, indirect tax, PwC.  

“TCS below 1 per cent will be a better scenario given that less money will be stuck in the system, but the compliance burden will be the same,” said Bipin Sapra, partner, indirect tax, EY.

While tax collected at source increases compliance burden on e-commerce players, it comes at a cost for the suppliers selling on the portals, as their working capital will get held up in the system for a while before they can claim a refund.

The vendors will be able to claim credit for the deductions based on the tax statement filed by the e-commerce operator. This means that the refund will be available to the vendor only in the next cycle. This will impact margins of vendors, the industry has argued.

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