Amplify e-commerce and help all MSMEs reach markets online

Covid has caused a tectonic shift in all spheres of our lives, economy, businesses, entertainment, kids’ education, travel, etc, apart from healthcare. The only common thread taking us through it has been digitalization and e-commerce. Businesses and services depend ever more on technology.

During the pandemic, digitalization and services, including e-commerce, fintech, edtech, medical tele-consultation, online entertainment, virtual travel and work-from-home proved saviours. Several innovative enterprises and tech startups sprang up, making India the world’s third biggest startup hub. Micro, small and medium enterprises (MSMEs) could also survive with technology and digitization of their processes, inventory management and interface with markets, either directly or via the e-commerce ecosystem.

As India’s economic recovery remains fragile, it would be prudent to help fast-track India’s e-commerce sector and the onboarding of MSMEs, which account for an estimated 30% of India’s gross domestic product (GDP) and constitute more than 40% of exports. However, currently less than 10% of Indian MSMEs sell online and 85% are unregistered. Although business formalization is happening, small retailers face several hurdles. Goods and services tax (GST) rules are a significant one, given their burdensome compliance costs and processes.

The current GST Rules provide that any offline seller with annual turnover under ₹40 lakh and engaged in intra-state sales must obtain GST registration to sell online. Additionally, offline sellers under ₹1.5 crore annual turnover with intra-state sales cannot continue with simplified GST compliance processes under the composite GST scheme if they want to sell online. Accordingly, even where an MSME’s turnover does not cross the threshold, it would be required to register itself under GST and fulfil all subsequent compliance requirements.

Under the current GST framework, many small businesses may not be able to transition from conventional sales to e-commerce platforms because their GST registration under the composition scheme may not be adequate, posing a hurdle in small business owners’ efforts to access the large customer base that global e-commerce majors and several others may offer. Moreover, MSMEs operating through online platforms are burdened with cumbersome and time-consuming periodical compliance needs like registration and the monthly filing of returns, which further dissuades them from registering under the GST Network. Yet, we must proactively get MSMEs selling online, as also artisans and farmer-producer organizations scattered across India, and provide them marketing support.

The government’s intention behind a threshold limit for registration might be to reduce the compliance burden for small conventional retailers. However, the discrepancy between registration thresholds for online and offline sellers, coupled with a complex GST registration process, can prove a major deterrent for small businesses keen to venture onto e-commerce platforms to expand their businesses. This results in an indirect tax revenue loss for the government.

Therefore, it may be prudent to provide an enabling GST ecosystem in the interest of all suppliers, online as well as offline. In the spirit of empowering small retailers and not placing online platforms at a disadvantage to brick-and-mortar businesses, MSMEs should be liable for GST only at the threshold value, irrespective of whether they sell offline or online. Enabling GST parity between offline and online sellers with respect to registration would be logical and help in integrating small business owners in the country with the e-commerce ecosystem. Also, amending the rules to allow small offline sellers to sell online (with intra-state restrictions) without needing a GST registration will increase GST and income tax collections for the government, increase control and transparency, and improve efficiency of tax collection.

As India charts a post-covid roadmap to economic recovery, it will be crucial to evolve a GST policy that’s sale-avenue agnostic, treating online and offline approaches alike. According to a report by Accenture and the Trust for Retailers and Retail Associates of India, digitizing just 10% of India’s 13 million odd kirana stores has the potential of generating an estimated 3.2 million new jobs in the country. To get MSMEs online, our policy focus should be on reducing their compliance burden.

There are a few other issues that also need to be addressed. For example, the differentiation of “essential” from “non-essential” products and services should be scrapped; in the covid era, what is non-essential for one may be essential for another. Similarly, Section 194-O, relating to TDS on payments made to e-commerce participants, should be axed. It does not help anyone and merely increases the compliance burden.

E-commerce has clearly played a phenomenal role in the rise of such economies as China’s. India must catch up fast with its domestic and export potential. In our quest to achieve a $5 trillion economy, we should boost digitalization, push inclusivity in ways that support MSMEs, ensure GST parity and empower small businesses to venture into the online ecosystem and diversify their operations.

Dhanendra Kumar is former chairman, Competition Commission of India and executive director for India at World Bank