Budget 2021 | Ecommerce companies seeks reduction in tax burden

The Budget also needs to formally clarify the overlapping effect of provisions of Equalisation Levy

By Amarjeet Singh and Anshul Aggarwal,

The ecommerce market globally is expected to double by 2024, with India becoming part of the top three ecommerce markets. Initiatives of the Indian Government such as Digital India, Start-up India, increased broadband penetration, are some key measures that have given thrust to this sector in India. Also, with the year gone by in lockdown, ecommerce industry has played a pivotal role in catering to the most minuscule and basic needs of consumers, thereby affirming that successful operation of a business requires an online presence.

The upcoming budget proposals for 2021-22 need to support the continued growth of this industry.

Advantage of this industry over traditional brick and mortar is that since all transactions take place online, compliances are also automated to a large extent.

The Indian tax authorities in the last two to three years have introduced several provisions specifically targeting this industry. Equalisation Levy (EL) on non-resident operators, Withholding Tax under Section 194-O, maybe good to increase the tax base or tax collections, but have increased the compliance burden substantially on ecommerce companies. The government needs to find a way to reduce the compliance burden, as most transactions of these entities are already covered under GST and therefore already subject to compliances.

The Budget also needs to formally clarify the overlapping effect of provisions of EL and withholding tax provisions relating to royalty/fees for technical Services.

Due to Section 194-O introduced for resident ecommerce operators, the industry is facing issues around the applicability of such provisions in cases where multiple ecommerce operators (ECO’s) are involved in a particular transaction. Similarly, due to different definitions of tour operator/package under Income Tax and GST, there seems to be a conflict between provisions relating to tax collection at source.

Travel Industry at ground level is still facing issues around the applicability of TCS provisions on non-resident travellers, stand-alone bookings and on transactions where multiple travel operators are involved.

With ecommerce sector already saddled with multiple GST compliances, the authorities have also started raising queries on the business modalities (like charging CGST and SGST, instead of IGST on specific transactions) for the sake of early realisation of GST revenues.

Given the business structure, mostly all ECO’s operate from a centralised location, but have taken GST registrations across India, just to comply with requirements under section 9(5) of CGST Act, wherein an ECO is treated as a ‘deemed supplier’ of notified supplies (like unregistered hotels, household services etc.). This has not only led to an increase in compliances and costs, but also increased questioning from state authorities on these issues. While allowing centralised registration has been the ask of the industry for a long time, till final decisions are made, ECOs should be allowed to use the head office address for registration under section 9(5) in states where they do not have office presence, similar to TCS provisions under GST.

Another issue that businesses are facing in respect of 9(5) compliances, is demand from the authorities on the notified supplies, even where consideration is paid directly to the supplier (like pay at hotel, cash rides etc.). This is leading to significant working capital constraints for the ECOs, as they are made liable to deposit tax from their own pocket, even where consideration is not collected by them.

Lately, during the pandemic, we have seen an upsurge in acquisitions/takeovers in a lot of ecommerce startups by the big players in the market. With such transactions in the picture, there is a permanent transfer of intellectual property rights (IPR) associated, as well. However, there is ambiguity around the classification of IPR as ‘goods’ or ‘services’, since the rate notification for both goods and services seem to cover permanent transfer of IPR. Therefore, its imperative that the government provide clarification on the right classification to avoid any litigation/ dispute with the authorities.

With the changed business economics, the use of ecommerce or digital platforms, for any size of business/industry/sector/location, is a must in this era. With the ecommerce sector being crucial to driving economic growth, the industry expectation is for the Government to see through on its vision of implementing ease of doing business norms, while rolling out the budget proposals for the year 2021-22.

(Amarjeet Singh is a Partner, Tax, Regulatory and Internet Business at KPMG India and Anshul Aggarwal is a Partner, Indirect Tax at KPMG India)