The e-commerce sector expects a reduction in the tax burden and a simplification of obligations

The introduction of e-commerce has completely revolutionized the market. Today, it is the most convenient, efficient and fastest form of trading used in the B2C and B2B sectors. Amid the global pandemic, e-commerce has grown exponentially. According to industry surveys, e-commerce activity in India is expected to reach $200 billion by 2026, driven by increased internet and smartphone usage in both urban and rural areas.

E-commerce has changed the commercial landscape, boosting consumption by giving retailers direct access to customers and providing new job opportunities. The government’s flagship initiatives on technology and digitization, which have delivered huge technological innovations, new modes of digital payments/online wallets, data analytics capabilities and the development of local logistics support, have indeed complemented the growth of this sector in India.

In India, tax and regulatory systems have fluctuated and undergone general changes to keep pace with the hot springs we see in the e-commerce environment. The e-commerce space is closely monitored and processed by tax regulators, with ever-increasing demands for business data from e-commerce operators to protect the interests of consumers and physical sellers. A number of changes to direct and indirect tax processes are urgently needed.

The impact of the equalization tax, which was implemented in the 2020 Union budget, has been one of the most controversial topics. The equalization levy affects the supply for orders placed by email or ERP with its wide scope. The growing list of services for which the tax burden has shifted from the actual provider to the e-commerce operator has been a significant source of concern on the indirect tax front. These regulations impose additional tax obligations on e-commerce facilitators, increasing the cost of services and causing inequality.

Here are some areas where tax and compliance reforms could help e-commerce run more smoothly and prepare for the next stage of expansion.

Direct tax (income tax)

TDS U/S 194 O is a major source of frustration for e-commerce businesses. COVID has already caused many business problems, including erratic sales cycles, a blocked supply chain and a shortage of workers. Due to these circumstances, profits have declined and in some situations losses have occurred. The deduction of the TDS amount causes a significant delay in receiving a refund, leading businesses to run out of working capital. Since all sales made on e-commerce platforms are subject to TCS deduction under the GST provision, CBDT may obtain data from CBIC to combat the likelihood of tax evasion.

Similarly, when the value of a transaction exceeds Rs 50 lakhs in a financial year, Section 206C 1(H) requires a deduction of 0.1% of the sale consideration. The low tax rate shows that the government aims to prevent tax evasion rather than generate revenue, which is already covered by 194O and the TCS under the GST clause. These multiple incidents lead to higher compliance costs, lack of working capital, and harassed e-commerce merchants. It is necessary to rethink the applicability of this clause, in particular for the well-being of small and medium-sized enterprises.

Indirect taxes

To address the problem of excessive input credit, the government should limit the number of tax rates. Many businesses are stuck with an additional GST credit on inputs for which they cannot collect a refund because the e-commerce supply chain encompasses multiple transactions of goods and services. The government should further simplify the return process by allowing refunds of GST paid on capital goods.

Other regulations

The government has imposed numerous limits on FDI capital to protect the domestic retail industry. However, India’s startup and e-commerce market is mature and has enough participants to prevent the risk of monopolizing or exploiting small traders. Accordingly, the government should consider relaxing FDI rules and allowing FDI-backed companies to engage in multi-brand retail.

Apart from the existing Made in India initiative, the government should loosen provisions governing entity formation, labor and employee regulation, attracting foreign capital and allowing for more innovation, turning it into a global manufacturing and innovation hub.

Summary

The e-commerce industry has been burdened with numerous tax liabilities, direct and indirect, as well as ongoing business disruptions due to an ever-changing tax and regulatory landscape. Essentially, the distinction between the e-commerce world and the physical world from a tax and regulatory perspective can limit the growth of the e-commerce space. The industry is therefore eagerly waiting to see how the budget plays out for gamers.

(The writer is founder and CEO, Upscalio-E-commerce roll-up company)

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Posted: Saturday, January 29, 2022, 9:48 PM IST