Growth in the e-commerce world has been catapulted exponentially, amid the global pandemic. Also in India, with increased use of internet and smartphones in the urban and rural landscape, the e-commerce space has been growing rapidly and is expected to reach $200 billion by 2026 according to industry studies. .
E-commerce has changed the business landscape, fueling consumption by providing direct access to end consumers and creating new employment opportunities.
What has truly complemented the growth of this sector in India are the government’s flagship initiatives in technology and digitalization which have resulted in huge technological innovations, data analytics capabilities, to new digital payment methods/online wallets and to the development of Logistics and support.
In India, the tax and regulatory landscape has been constantly evolving and undergoing 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 watched and scrutinized by tax regulators, with ever-increasing demands for transactional data from e-commerce operators, in an effort to protect the interests of consumers and those of physical retailers.
The intention seems largely to study the footprint of the e-commerce space on the fiscal and regulatory environment, due to its complex nature and the multitude of layers of businesses transacting.
Along the same lines, the government has made various changes to FDI standards, income tax provisions and GST laws.
These include the embargo on the ownership of inventory by an e-commerce entity, regulations on business practices (with the prohibition for e-commerce entities to directly/indirectly influence the selling prices of goods /services), withholding tax obligations (TDS) by e-traders and withholding tax (TCS) by suppliers making online sales on e-commerce platforms, and separately the TCS provisions and 9(5) of the GST statutes.
One of the most debated issues has been the impact of the equalization tax, introduced in the 2020 Union budget. A simple interpretation of the scope of the equalization tax would mean that it would apply to transactions facilitated online, with its wide reach, its impact includes supplies whose orders are placed by e-mail or on the ERP.
It is an industry expectation that a few qualifiers would be introduced to this levy, limiting its scope. Also, it would be important to clarify the fate of the Equalization Levy, given the imminent 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 where the tax burden has shifted from the actual provider to the e-commerce operator.
This provision imposes additional tax obligations on e-commerce facilitators (in almost all states in India) and ultimately increases the cost of services, which creates disparities.
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For example, non-air-conditioned vehicle services that are otherwise not taxable would be made taxable if booked through an online portal, as would restaurant services. This would lead to new operational challenges such as the realization of partial billings, billing at differential rates, among others.
Other illnesses affecting e-commerce operations, particularly those located offshore, have been the enforcement of TCS provisions and the liability for accessing and retrieving databases of online information ( OIDAR).
In addition to state-based records, TCS, e-commerce operators face major issues in reconciling transaction data. Separately, OIDAR service providers, although expected to discharge OIDAR tax liability, do not enjoy any benefit of offsetting the benefit of Input Tax Credit (ITC) from expenses related to Indian transactions.
At the same time, there are also provisions under Section 194-O of the Income Tax Act, which require e-commerce operators to withhold taxes at the rate of 1% from payments made to sellers. using the goods/services sales platform.
These provisions of the TDS do not distinguish between resident and non-resident taxpayers. All these provisions are quite cumbersome for operators and impose a heavy burden of compliance.
E-commerce businesses have been under the radar of tax authorities through multiple investigations/assessments/audits. Despite the distribution of taxpayers between the central government and the state governments, in recent times there have been many cases where taxpayers have been subject to overlapping investigations by the central tax and state tax offices. state taxes.
From a regulatory perspective, the Consumer Protection Act and its rules need to be amended and specific rules need to be introduced to strictly regulate e-commerce entities.
It is also understood that a specific e-commerce policy is to be released soon, which could define other nuances and regulations that would help solve many problems.
It is the industry specific demand that specific guidelines be issued by the government that clearly define the contours of how business is conducted through both e-commerce and the physical world.
The e-commerce industry has been burdened with multiple tax liabilities, both direct and indirect, and has also faced constant business disruption with what is an evolving tax and regulatory space.
Essentially, the distinction between the e-commerce world and the physical world from a 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 India; and Shreya Tripathi contributed to this article.)
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