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With the conclusion of the latest set of GST Council meetings on 23 December 2016, it is near certain that the provisions of the ‘revised’ Draft Model GST Laws (the Approved Draft) for CGST and SGST will become law (IGST expected to be finalised early January 2017) without material change in language or legal principles of the said provisions. This is of course subject to the legally vetted and prepared final drafts of the same being presented before the Indian Parliament and various State Legislative Assemblies respectively, and then being passed or legislated into such enforceable law.

For most Startups and even established or traditional business/service models, e-commerce is quickly becoming a default mode of transacting business or providing services, supplementing and even replacing the physical medium for effecting the same. Given the already substantial and exponentially growing ‘electronic or e-commerce’ business and industry in India, it can be safe to presume that much is expected by the Administration from it as a growing source of tax revenue, achieved through regulatory compliance by the ‘electronic commerce operators’.


Approved Draft and E-Commerce

The previous draft i.e. the ‘Model Draft GST Laws’ (the First Draft) release earlier into the public domain for consideration, differs significantly to the later Approved Draft on the subject of ‘E-Commerce’ and related matters. Some of these differences are as follows —

  • Through Chapter XIB and section 43B in particular, the First Draft expressed technical and complex definitions of some key terms such as ‘aggregator’, ‘electronic commerce’ and ‘electronic commerce operators’, and subject to the provisions of section 43C, affixed obligations of collecting GST at source on them, compulsory registration under Schedule III and deemed ‘supply’ by Aggregator through ‘branded service’.
  • Significantly, the Approved Draft has deleted the above mentioned definitions and any reference to an ‘aggregator’, and relatively simpler definitions find place therein under section 2 (‘Definitions’) —

electronic commerce’ means supply of goods and/or services including digital products over digital or electronic network

‘electronic commerce operator’ means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce

  • Through Chapter XIV and section 56 (‘Collection of Tax at Source’ or TCS) of the Approved Draft, every ‘electronic commerce operator’, not being an agent, is required to collect an amount calculated at the rate of 1 percent of the ‘net value of taxable supplies’ made through it by registered ‘taxable persons’, where the consideration with respect to such supplies is to be collected by such operator.
  • Section 8(4) of the Approved Draft also enables the Central or a State Government, on the recommendation of the GST Council, by notification, to specify categories of services, the tax of GST on which shall be paid by the electronic commerce operator, if such services are supplied through it, and all the provisions of the Act will then apply to it as if such person is liable for paying the said tax in relation to the supply of such services.
  • Schedule V of the Approved Draft states the different types of persons (not supplying non-taxable or exempt goods/services) required to compulsorily register for GST, which also include the following –
    • Persons who are required to collect tax under section 56, whether or not separately registered under the Act
    • Every ‘electronic commerce operator’ and ‘non-resident taxable persons’, irrespective of the ‘threshold’ specified in paragraph 1 to Schedule V etc.

 
> Read more on GST ‘Registration’


GST Compliance Burden on E-Commerce Business Models

The substituted definitions for ‘electronic commerce’ and ‘electronic commerce operator’ in the Approved Draft may be considered good draftsmanship by some, as it leaves much for subsequent favorable interpretation by the authorities concerned and thus enables the GST net to be cast wider when the need arises. When these are read with the definition of ‘Supply’ under section 3 and/or TCS obligations as well those under section 8(4) for notified categories of services, this GST net has already been cast quite wide for e-commerce business. The question then arises, whether any particular e-commerce business or Startup is equipped to discharge its compliance obligations, which will be significant and resource consuming.

> Read more on ‘Supply’

Through my read and understanding of the relevant provisions of the Approved Draft and e-commerce business models in general, from a legal standpoint, it appears that there are strategies through which such compliance burden can be lawfully quarantined or passed on to the appropriate person/entity, if so required. Subject to the classification of goods/services, GST rates thereon, tax residency and any notification under section 8(4), such strategies may however require a business or transaction re-model or re-structuring as well consequential legal or contractual rearrangements, which for an e-commerce Startup in its early stages of setup or operation, would be easier and faster to execute as compared to established businesses.


Proactive Strategies

There is strong opinion and prediction that the previously expected date of 1 April 2017 for GST ‘roll-out’ will not be met. However true this prediction may be, it is still near certain that GST will become law at some point in the coming financial year. Therefore, an understanding of how GST will affect an e-commerce business or Startup and then pre-emptively making strategic decisions for compliance purposes etc., is an immediate necessity and the benefit of time still available before the eventual ‘roll out’ is a precious advantage that must be wisely made use of.

 
Article by

Anand Chaudhuri
Advocate (Taxation & Criminal Law)
LL.B (CLC Faculty of Law, Delhi University), JD (UNSW)
e: contact@minustax.com
l: https://www.linkedin.com/in/anand-chaudhuri

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Featured image © Ludovic Bertron used under the CC Attribution 2.0 Generic license

 

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