The decision of the GST Council, the all-powerful body to decide the tax architecture and rates on various items, to require e-commerce companies to levy 1% tax on all transactions made on their platforms has led to widespread consternation. So much so, it was forced to defer its implementation indefinitely. But the idea is not new.
Even under the erstwhile state sales tax/VAT (value-added tax) dispensation, the Karnataka commercial taxes department had directed e-commerce companies to deduct 1% of the money payable to the merchant towards tax and remit the same to the department. The merchant/dealer, in turn, could claim credit or refund on this amount while discharging his liabilities.
The move was triggered by tens of thousands of dealers evading payment of sales tax/VAT, aggregating to thousands of crores of rupees legitimately due to the department on sales made on e-commerce portals. The intent was to enable the tax department to get to know the details of all transactions done on e-commerce platforms so that it could identify and chase the dealers to collect VAT dues from them.
In India, e-commerce companies such as Flipkart and Amazon are intermediaries that only act as 'facilitators', helping sellers and buyers conduct transactions on their platform. It provides services, such as registering a request for an item, raising invoice, arranging delivery, accepting payment, etc, in lieu of a fee. It is not a party to the transaction. The only exception is where it is also a seller by virtue of owning the goods.
VAT/GST is paid by the buyer and collected by the seller who, in turn, deposits it with the tax authorities. In this regard, the e-commerce entity has no legal sanctity. The situation cannot be compared with TDS (tax deduction at source) wherein the employer while making payment of salary deducts a certain percentage of money payable as income tax and deposits it with the I-T department. The employee can adjust this against her overall tax liability for the year.
The move to collect tax at an arbitrary rate of 1% has no connection whatsoever to the actual tax liability of the trader/seller. Its levy is not legally tenable. In a case involving Larsen and Toubro, the Karnataka High Court struck down a provision in the Karnataka Sales Tax Act, 1957, that required government agencies to deduct a certain percentage of tax before making payments to a private contractor handling government projects.
The court had ruled that tax authorities cannot claim tax at source without quantifying the liability of the dealer (contractor). The Supreme Court, too, has barred excess deduction of tax at source by tax authorities. Therefore, asking e-commerce companies to deduct tax, albeit a miniscule (notional) 1% is legally untenable and will be struck down by the court.
Yet, if the authorities go ahead with imposition of the tax, apart from leading to avoidable litigation, this will lead to additional compliance requirements for e-commerce companies as well as the seller. For small traders (annual turnover less than Rs 25 lakh), it will be a double whammy as they not only have to register under GST but also will face cash-flow issues. The problem will be more for those who have no tax liability (for instance, those dealing in exempt products) or traders who have opted for composition scheme.
Then, how to rein in tax evasion, especially in respect of sales made on an e-commerce platform, where it is not easy to track and establish the identity of the seller? The difficulty arises because unlike purchase made from a physical store which can be easily traced, for those made from an online portal which handles sales of a large number of traders, this could be tedious. There are instances wherein the e-commerce company is also the seller but camouflages itself as a mere facilitator/'market place' to be able to avail of 100% FDI or even escape the tax net.
But, let us not forget that the GST architecture is designed primarily to curb evasion, bring all transactions, including those done online, under the tax net and ensure that all taxes are deposited in full with the authorities. Since this tax is levied on value addition at each stage in the supply chain, with a proviso for credit in respect of tax paid on purchase of inputs, it is incumbent on every entity to be part of the GST network (GSTN). Else, he won't get input tax credit.
E-way bill, matching returns
If, with a purported intent to evade payment of tax, a manufacturer/dealer decides not to be a part of the supply chain, still the transactions done by him will be detected by the authorities as his purchase/sales will be reflected in the returns filed by others with whom he deals. But this is predicated on matching of the returns filed by different entities. Indeed, matching holds the key to curbing leakages. But the GST Council has deferred implementation of this most crucial provision till March 31, 2018.
Another key feature of GST architecture is the e-way bill, which allows tax authorities to electronically track movement of goods. Under it, all goods worth over Rs 50,000 are pre-registered online before they are moved for sale beyond a 10 km radius. The GST Council had deferred the implementation of this, too. But, seeing a decline in revenue, especially in November 2017, it has now decided to implement the e-way bill from February 1, 2018, for inter-state transactions and from June 1, 2018 for intra-state transactions.
With this, and the matching of returns to commence on April 1, 2018, it should be possible for authorities to chase each and every transaction and levy tax. This will obviate the necessity of asking the e-commerce company to deduct the 1% tax, which is untenable anyway. The GST Council will do well to drop the 1% idea.
(The writer is a New Delhi-based policy analyst)