'Tax Col­lec­tion at Source' un­der Model GST Law an ex­is­ten­tial chal­lenge for e-com­merce mar­ket­places

FICCI Business Digest - - News -

FICCI or­gan­ised a press con­fer­ence in New Delhi on Fe­bru­ary 9, 2017, to high­light the con­cerns of the ecom­merce sec­tor per­tain­ing to the clause of “Tax Col­lec­tion at Source” (Sec­tion – 56) pro­posed un­der the Model GST Law in the pres­ence of in­dus­try lead­ers and key stake­hold­ers.

E-com­merce is one of the flour­ish­ing sec­tors of the coun­try and has re­mained as a core part of the Gov­ern­ment's Start up India, Make in India, Dig­i­tal India and Skill India pro­grammes. The sec­tor needs to be nur­tured with the right pol­icy frame­work and guide­lines in or­der to make it more pro­duc­tive.

FICCI ap­pre­ci­ates the Gov­ern­ment for pass­ing of the much awaited 'Goods and Ser­vices Tax' Bill and is cer­tain that the im­ple­men­ta­tion of GST will help in in­creas­ing the pro­duc­tiv­ity and trans­parency in the coun­try by in­creas­ing the tax-GDP ra­tio. More­over, the much awaited One-Coun­try-One-Tax pol­icy will be im­ple­mented in the greater in­ter­est of the na­tional econ­omy.

How­ever, the draft Model GST law pro­poses a clause called Tax Col­lec­tion at Source (TCS – Sec­tion 56). The Tax Col­lec­tion at Source (TCS – Sec­tion 56) clause un­der the GST draft model law man­dated e-com­merce mar­ket­places, to deduct 2% of the trans­ac­tion value and sub­mit it to the gov­ern­ment. As an es­ti­mate, this clause would lead to lock­ing up about Rs. 400 crores of cap­i­tal per an­num for the e-com­merce sec­tor. In ad­di­tion, it would re­sult in a loss of an es­ti­mated 1.8 lakh jobs, putting a halt to the growth and in­vest­ments in the sec­tor.

TCS would have a di­rect impact on the sell­ers of the mar­ket­place, who are gen­er­ally small in na­ture with a turnover in the range of Rs 50 lakh to Rs 10 crore per an­num. The e-com­merce mar­ket­place model fa­cil­i­tates sell­ers in max­imis­ing their cap­i­tal ef­fi­ciency by ro­tat­ing it fre­quently, which helps to pro­vide the vol­umes re­quired to gen­er­ate profit for the sell­ers. Block­ing cap­i­tal would dis­rupt the cash flow, thus mak­ing it dif­fi­cult for sell­ers to gen­er­ate prof­its. Ad­di­tion­ally, TCS is bound

to in­crease the work­ing cap­i­tal re­quire­ments for the sell­ers, who might re­sort to in­creas­ing mar­gins or in­ter­nal­is­ing the costs, to cover the ad­di­tional bur­den. There is a need to find out al­ter­na­tives which could be em­ployed to en­sure that reg­u­lar in­for­ma­tion on tax is made avail­able to the gov­ern­ment, with­out jeop­ar­dis­ing the busi­ness model and fu­ture growth prospects of the nascent e-com­merce sec­tor.

Fol­low­ing con­tin­u­ous pol­icy on the is­sue by in­dus­try as well FICCI on sev­eral fronts, the GST Core Com­mit­tee has rec­om­mended di­lu­tion of the pro­vi­sion of trans­ac­tion value to one per cent. FICCI truly rec­og­nizes the full worth of the move of the Gov­ern­ment. How­ever, the Cham­ber rec­om­mends dele­tion of the clause from the Model GST Law as rather than the per­cent­age it is the costs in­volved for the com­pa­nies/SMEs in terms of the man­power and com­pli­ance bur­dens that has to be re­solved.

Dr A Di­dar Singh, Sec­re­tary Gen­eral, FICCI, ap­pre­ci­ated the moves of the Gov­ern­ment to­wards dig­i­ti­za­tion and for­mal­iza­tion of the econ­omy fur­ther and quoted the re­cent ex­am­ple of de­mon­e­ti­za­tion in this per­spec­tive. He added that pass­ing of the much awaited GST Bill would bring fur­ther uni­for­mity in the mar­ket and boost the na­tional econ­omy. How­ever, he stressed that there is a need to have a con­ducive tax en­vi­ron­ment for the sec­tor as also re­flected in the agenda of World Trade Or­ga­ni­za­tion (WTO) glob­ally. The Tax Col­lec­tion at Source (TCS) clause within the Model GST Law man­dates the e-com­merce mar­ket­places to deduct a por­tion of the amount payable to the sup­plier of goods/ser­vices and re­mit it to the gov­ern­ment. At the mo­ment, the e-com­merce sec­tor in India is at less than 2% of the en­tire re­tail seg­ment and more­over, at a very nascent stage, with a prom­ise of high growth in the fu­ture.

Sub­ject­ing the sec­tor to a ma­jor com­pli­ance at such an early stage will not only re­sult in slow­ing it down but also de­ter the ben­e­fits that e com­merce fos­ters in terms of em­ploy­ment cre­ation and giv­ing a boost to both the man­u­fac­tur­ing and ser­vices space by pro­vid­ing an apt plat­form. More­over, this clause is dis­crim­i­na­tory to­wards on­line sell­ers as it does not ex­ist in the off­line re­tail seg­ment.

Dr. Singh sug­gested that the Gov­ern­ment should find out al­ter­na­tive ways to re­place the clause, may be the in­for­ma­tion re­lated to the sell­ers de­clared to the Gov­ern­ment would be the best fea­si­ble op­tion avail­able. He also stressed that the sec­tor is one of the core pil­lars of the Gov­ern­ment's 'Dig­i­tal India' cam­paign and is needed to be nur­tured with right set of pol­icy frame­works and guide­lines.

Ku­nal Bahl, Co-founder and CEO, Snapdeal said, “GST is a key tax re­form, which will sim­plify the tax com­pli­ance bur­den for the en­tire econ­omy. How­ever, the pro­posal of tax col­lec­tion at source, di­rected only at ecom­merce mar­ket­places, in the Draft Model GST Law, will hurt lakhs of small sell­ers by mak­ing on­line sales ex­pen­sive and cum­ber­some for them. The pro­posal, while ad­ding need­less com­plex­ity for the sell­ers, pro­vides no ben­e­fit to the tax au­thor­i­ties and will lead to du­pli­ca­tion of in­for­ma­tion fol­lowed by the need for its rec­on­cil­i­a­tion. It is a mea­sure, which goes against the spirit of mak­ing India dig­i­tal and im­prov­ing the ease of do­ing busi­ness in the coun­try. We are pos­i­tive that the gov­ern­ment will ad­dress this cru­cial con­cern.”

Amit Agar­wal, Coun­try Head, Ama­zon India, men­tioned, “We wel­come the in­tro­duc­tion of the new GST Bill. E-com­merce has opened up im­mense growth op­por­tu­ni­ties for small & medium busi­nesses by en­abling easy and con­ve­nient ac­cess to not only a na­tion­wide con­sumer base but also to global mar­kets. We be­lieve GST is good for the e-com­merce in­dus­try as it would elim­i­nate hur­dles in in­ter­state de­liv­ery and sub­sume the en­try tax in­tro­duced on e-com­merce ship­ments by some states. How­ever, we re­main con­cerned about the Tax Col­lec­tion at Source pro­vi­sion which we be­lieve will nega­tively impact the growth of mar­ket­places at a stage when the in­dus­try is still in its in­fancy. There is an ur­gent need to reeval­u­ate such an oner­ous re­quire­ment. We are work­ing with the gov­ern­ment on this and hope for a favourable res­o­lu­tion.”

Sachin Bansal, Co-founder & Ex­ec­u­tive Chair­man, Flip­kart, said, “The In­dian e-com­merce growth story is mar­vel­lous. Flip­kart alone has on boarded around 10,000 sell­ers and has con­trib­uted a lot to­wards the growth of first gen­er­a­tion en­trepreneurs, I am sure that the other com­pa­nies have sim­i­lar num­bers. GST is in fact one of the most for­ward look­ing moves be­ing made by the Gov­ern­ment and would bring the 'One Coun­try - One Tax Pol­icy'. How­ever, the Tax Col­lec­tion at Source (TCS) clause would lead to block­age of ap­prox­i­mately Rs. 400 crore of work­ing cap­i­tal into the sys­tem and will dis­cour­age sell­ers to come on­line. Also, the Gov­ern­ment needs to set a level play­ing field as the clauses are not per­ti­nent to the off­line re­tail seg­ment. The Cen­tral and the state gov­ern­ments need to find al­ter­na­tive ways to ad­dress the sit­u­a­tion and the e-com­merce plat­forms may give a self-dec­la­ra­tion about the taxes be­ing re­im­bursed by the sell­ers. Some of the states namely Ker­ala, Ra­jasthan and Delhi are al­ready do­ing the same. I am sure that the clause would be re­moved in the greater ben­e­fit of the In­dian dig­i­tal space as a whole.”

The con­fer­ence wit­nessed the par­tic­i­pa­tion from key stake­hold­ers across the spec­trum at se­nior lev­els in­clud­ing Ku­nal Suri, COO, FoodPanda and rep­re­sen­ta­tives from in­dus­try.

E-com­merce in­dus­try stal­warts.

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