The decision of the GST [Goods and Services Tax] 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 platform has led to widespread consternation. So much so, it has been forced to defer its implementation until March 31, 2018. 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 then claim credit or refund on this amount while discharging his/her liabilities.
The move was triggered by tens of thousands of dealers evading payment of ST/VAT aggregating to thousands of crores legitimately due to the department on sales made on e-commerce portals. The intent was to enable tax department get to know details of all transactions done on their platform so that it could identify and chase the dealers for collecting the VAT dues.
An e-commerce company is an intermediary which merely acts as a ‘facilitator’ helping sellers and buyers conduct transactions on its platform. It provides services such as registering request for an item, raising invoice, arranging delivery, accepting payment, collecting rejection etc in lieu of a fee. It is not a party to the transaction. The only exception is where it happens to be a seller by virtue of owning the goods and accepting full responsibility for them.
VAT/GST is paid by the buyer and collected by the seller who in turn, deposits it with the tax authorities. The e-commerce entity has no legal sanctity in this regard which is entirely the responsibility of the seller. If, however the intention is to find out as to who sold the goods and how much so that the authorities could make them pay up then, there are other legally sustainable ways of doing it.
The situation cannot be compared with TDS [tax deduction at source] wherein the employer while making payment of salary or the recipient of a service paying fee to a professional deducts 10% of the amount payable and deposits with the income-tax department. The employee/professional can adjust this against his/her overall tax liability for the relevant year with the department.
The move to collect tax at an arbitrary rate @1% has also no connection whatsoever to the actual tax liability of the merchant/trader. It is not legally tenable. In a case involving Larsen and Toubro, the Karnataka High Court [KHC] 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]. Supreme Court [SC] too has barred excess deduction of tax at source by tax authorities. Therefore, asking e-commerce companies to deduct tax albeit even it is miniscule [notional] @ 1% is legally untenable and will be struck down by the court.
Yet, if GST/authorities go ahead with imposition of tax, apart from leading to avoidable litigation, this will lead to additional documentation and inconvenience to e-commerce company and the dealer. Besides, this will cause cash flow problems especially for merchants who have no tax liability [for instance, those dealing in products that are ‘exempt’ from levy of the tax]. The situation will be particularly difficult for traders operating on small margin.
Then, how to rein in tax evasion especially in respect of sales made on e-commerce platform where it is not easy to track and establish the identity of the seller? The difficulty arises because of the very nature of transactions made from this platform. Unlike purchase made from a mom-and-pop store which can be easily traced, for those made from e-portal which handles sales of a large number of traders, this can be a nightmare.
There are instances wherein the e-commerce company is also the seller as apart from performing all sales related functions viz. taking orders, invoice, delivery etc it also owns the inventory of goods. Yet, it camouflages itself as mere facilitator or to use a technical jargon ‘market place’ model. While, it may be doing so to avail of 100% foreign direct investment [FDI] permitted for investment in such entities, this can also help in escaping payment of VAT or GST.
The fundamental objective of GST is to curb evasion, bring all transactions [including those done on e-portal] under the tax net and ensure that tax is deposited in full. 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 for every entity to be part of GST network [GSTN] or else he won’t get input tax credit.
If, with a purported intent to evade payment of tax, a manufacturer/dealer decides not to be a part of the supply chain, the transactions done by him will still be detected by the authorities as his/her purchase/sales will be reflected in the returns filed by others with whom he/she 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 10 km. GST Council had also deferred its implementation. But, sensing substantial decline in revenue, it has now decided to implement from February 1, 2018 for inter-state transactions and intra-state from June 1, 2018.
With this and matching of returns to commence from 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 e-portal to deduct tax @ 1% which anyway is untenable. The Council will do well to drop this idea.