GST: India’s 21st century startups think they finally have a 21st century tax system

Smoother delivery.
Smoother delivery.
Image: Reuters/Anindito Mukherjee
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The Indian e-commerce industry, for long a victim of an archaic tax regime, is thrilled that the country has moved closer to a unified tax regime.

Late on Aug. 03, the upper house of the Indian parliament, Rajya Sabha, passed a bill that makes way for the rollout of Goods and Services Tax (GST), a system that will replace 17 state and federal taxes. This is perhaps the biggest tax reform India has had since its independence around 70 years ago.

Several leaders of the Indian e-commerce industry expressed their happiness on Twitter:

E-commerce companies have been struggling with the existing tax structure that was created long before the industry was born. The industry had complained often that the old system impedes online retail startups.

Here are the major benefits of the GST for Indian e-commerce:

One country = one law

Companies have struggled to understand and comply with the multiple taxation laws of various Indian states. While expanding into smaller towns and cities is key to the success of online retailers, meeting the unique requirements of each state can be frustrating and exhausting.

No dual taxation

Since products are bought and sold through websites, states have often asked if sales tax should be applied in the state where the seller is located or where the buyer is.

Under the current law, firms pay taxes in the state where the seller is located, but that has been challenged by some states. Last year, the southern Indian state of Kerala had slapped a Rs54 crore fine on a bunch of e-commerce companies for sales tax evasion. These companies included Flipkart, Jabong, Myntra, and Kerala’s tax officials had said that even though these companies didn’t have shops in the state, they were delivering products there, which amounted to “local trade.” Flipkart challenged this claim in the Kerala high court and won.

The GST will be levied in the state where the consumer resides, which means there will be no need to pay additional taxes like excise on manufacturing, VAT on sales, and entry tax for a particular area.

“A simple example would be if an online shopper in Mumbai is purchasing a mobile phone through a marketplace with headquarters in Bangalore from a vendor based in Delhi, for his mother who is based in Kolkata, and the package is sent to the Kolkata address, the place of consumption will be state of West Bengal who will get the allocated tax for this sale,” said Sreedhar Prasad, partner—e-commerce, KPMG India.

Free movement across India

The GST could potentially make sourcing, distribution, and warehousing of goods easier between the Indian states, like in the European Union.

In July, Sachin Bansal, co-founder and executive chairman of Flipkart had said that the passing of the GST bill would be “India’s reverse Brexit moment.”

“Currently, supply chains for e-commerce companies are not optimised but distorted by regulatory cholesterol that prevents us from offering customers the lowest cost or fastest delivery,” Bansal had said in a blog post on The Times of India website on July 25. “With GST, all of this will be history.”

Currently, checks at state borders in India slow down the movement of trucks across the country. Trucks in India travel 280 kilometers a day, far slower than the 800 kilometers travelled by those in the US.

Less ambiguity

Since most tax laws in India were made before e-commerce was born, there have been times when states and companies differed on the interpretation of the law.

For instance, the Karnataka tax authority had in 2014 stopped Amazon India from selling some products from its warehouses in the state and cancelled the licences of some merchants who supplied goods to the company. The state said that Amazon must pay taxes on goods stored in its warehouses. However, the company claimed its facilities were not warehouses but “fulfilment centers” and that it was not earning any profits on the stocks there but only charging a commission on them.

No unnecessary paperwork

Since last year, Flipkart, Snapdeal, and Amazon India have stopped delivering products worth more than Rs5,000 in the northern Indian states of Uttar Pradesh and Uttarakhand. Tax authorities there had made it mandatory for buyers to file VAT declaration forms at the time of delivery, with officials even seizing goods if buyers did not comply.

Lesser tax burden

While the government has not yet set the GST rate, some e-commerce players believe it will lower their tax burden. News reports peg the GST rate at between 15% and 18%.

“If you add all the taxes together, today this is almost 27-32%… With GST coming in say at 18-19% zone… that is still a difference of 8% to 10%. Large part of that will eventually get passed on to the customer,” Ashish Goel, co-founder and CEO of online furniture retailer Urban Ladder, told NDTV Profit.

The downside

Even though it may be mostly beneficial, some believe that the GST will pose a few challenges in the near-term.

Mohandas Pai, a former top executive of IT major Infosys, said that e-commerce companies would struggle with frequent tax filings under the new regime.

“The bill states that e-commerce companies will have to collect taxes from the sales made on that portal, and they have to file monthly and quarterly returns. So they have to take on the burden of collection and paying to the government and monthly/quarterly returns to make sure they’re not evading taxes,” Pai told NDTV Profit.