Photo: Bloomberg
Photo: Bloomberg

Tax collected at source by e-commerce firms: Too much pain for little gain?

The fear is that it will impact their credit cycle with vendors, causing working capital shortages, especially for small- and mid-sized e-commerce firms

The days of increased compliance for e-commerce companies are just around the corner. Come 1 October, under the goods and services tax (GST) law, e-commerce firms will deduct 1% as tax collected at source for each transaction carried out on their online marketplaces. To collect this tax, e-tailers will have to get themselves registered in each state where their vendors are located. Foreign e-commerce companies will also have to comply with these provisions.

The tax collected by these companies has to be deposited by the 10th of the next month. Also, a monthly and an annual statement containing details of the outward supplies (sales transactions) will have to be furnished.

Simply put, for e-commerce companies, this would lead to a surge in compliance costs. Also, the fear is that it will impact their credit cycle with vendors, causing working capital shortages, especially for small- and mid-sized e-commerce firms.

This is yet another attempt (after e-way bill) by a government desperate to revive revenue to curb tax evasion by bringing more vendors in the GST database.

However, the result of this move may not be proportionate to the time, effort and money that the e-commerce companies will be employing. Since offline vendors are exempt from this provision, suppliers may switch to selling products via the offline route. And if a large number of suppliers do that, it defeats the purpose of this exercise.

Tax experts added that even if revenue were to improve due to this, it would happen with a lag of a few months. And until that time, if crude oil prices remain elevated or the rupee depreciates further, the required monthly run-rate for GST revenue to support the country’s fiscal position would increase.

Calling this provision as an unfair liability imposition on the sector, the Internet and Mobile Association of India said that it will create operational challenges for e-commerce companies.

Various media reports state that anxious e-commerce companies, who fear trade disruptions ahead of the forthcoming festive season, are still hoping for a postponement.

But tax experts, who declined to be named, stated that the government is not in the mood to consider any deferment since the implementation date was already postponed from 1 July to 1 October. However, some relief on the returns filing front can be expected, they said.

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