Checklist to Setup online marketplaces in India in 2021

The new 1% tax will be implemented from April 2020.

What is Marketplace?

  • Marketplace enables third-party sellers to register and sell online on their platform.
  • Marketplace charges a subscription fees/ commission on sale value from listed sellers.
  • Third-party sellers under this model gain access to a larger customer base, registered with marketplace.
  • Customer on the other hand gain access to multiple sellers and competitive prices for desired products.
  • Items purchased on such marketplaces are either shipped by Merchant/Third-party seller directly or through the fulfillment center managed by Marketplace Operator.

Do I need to register for GST?

It depends. In general, GST registration is mandatory if your business meets any of the following conditions:

  • Your turnover in a financial year exceeds Rs 20 lakhs (Rs 10 lakhs for North Eastern and hill states).
  • Your business is registered under an earlier law, such as Service Tax or VAT.
  • You are involved in inter-state supply of goods.
  • You sell on online marketplaces.

No threshold for GST registration

Government has specified a threshold limit for all the businesses. A business is liable to register for Goods and Services Tax once such threshold limit is breached. Click here to read more about threshold limits under GST. However such limit is not applicable in case of E-Commerce sellers*. *e-commerce sellers need not register if total sales is less than Rs. 20 lakh. Notification No. 65/2017 – Central Tax dated 15.11.2017.

No Benefit under Composition Scheme

Most of these sellers registered with marketplace operators are small and medium businesses. Government has introduced composition scheme under GST law. This scheme is primarily aimed to reduce the burden of compliance for small and medium businesses. Under this scheme, businesses are required to file returns quarterly instead of monthly and pay taxes at nominal rates up to 2%. However GST law has explicitly excluded e-commerce businesses from this scheme.

Tax Collection at Source by Marketplace Operator

Under the new tax regime, marketplace operators are mandatorily required to deduct a percentage amount as the GST liability of seller and deposit it with government. This mechanism is being termed as β€œTax Collection at Source (TCS)” under the GST law. Eventually the marketplace seller will have to file monthly return under GST to claim the credit of TCS collected by the marketplace operator. This will also impact the liquidity and cash flow of these sellers.

While all the marketplace operator have already completed the first level analysis of impact of GST on their operations, marketplace sellers are still unaware of these rules.

Need of the hour is to keep themselves aware of the changes that are going to come. Also such sellers should now start planning their transition strategy for GST regime.

Goods And Services Tax On E-Commerce Transactions

Goods are Services Tax [GST] has been imposed on “supply of goods or services”. It is immaterial as to under what mode of communication the supply contract is negotiated. Tax remains the same even when contract is negotiated orally, in writing or through e-communication. Thus, on a fundamental level, GST on e-commerce operator remains similar to any other mode of supply. Nevertheless, there are a few distinctly specific provisions applicable to e-commerce operators and suppliers of goods or service supplying through e-commerce portals. This article is an attempt to explain those provisions.

There can be two models of e-commerce. One situation can be where the supplier himself supplying goods or services through e-commerce portal. GST laws remains the same for the said supplier. Another model is the marketplace or fulfilment model of e-commerce, popularized by Amazon or Zomato; or aggregator model followed by Ola or Urbanclap. In this model, the e-commerce operator merely provides a platform to various suppliers. Two transactions are happening in this model- (i) supplier supplying goods or services to the consumers and (ii) the e-commerce operator supplying services to the supplier using its platform. These are distinct transactions, and attract GST on their own.

Liability to pay GST

As a general rule, liability to pay GST is on the supplier of service. Even in e-commerce transactions, the persons supplying goods or services through the platform are the suppliers. Thus, a person selling the goods on Amazon, is supplier of goods and he is required to follow GST provisions in respect to those supplies. Similarly, a motor cab renting supplier is the supplier of services, even when he is making the supply using the aggregator platform.

However, Section 9(5) of the CGST Act provides that the Government may, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it. Three services, namely (i) Motor Cab (ii) Hotels and accommodation and (iii) Housekeeping services has been notified under Section 9(5) of the CGST Act.

It may be noted that under Section 9(5) of the CGST Act, only supply of services can be notified, where e-commerce operator can be made liable to pay tax on such supply when such supply is affected through its portal. In Re: Opta Cabs Pvt. Ltd. [2019 (20) GSTL 161], Appellate authority of Advance Ruling held that when transportation of passenger service is provided by the taxi drivers by using a software application, the e-commerce operator is liable to pay GST even if payment is not directly received by the e-commerce operator. Thus e-commerce operators, engaged in providing services notified under Section 9(5) of the CGST Act are required to develop their model in such a way that they can discharge the GST liability.

In respect of supply of goods, the liability to pay GST always remains on the supplier of goods. Thus, any person supplying goods through Amazon is responsible for discharging its own GST liability. In case of supply of services, all suppliers of services are required to discharge its own GST liability, except the services notified under Section 9(5) of the CGST Act.

Threshold Exemption Limit

Under Section 24 (ix) of the CGST Act, every person supplying goods or services through electronic commerce operators are required to be compulsorily registered, without any threshold exemption limit. However, the Government has power to exempt specified supplier from registration. Vide Notification No. 65/2017-C.T., dated 15-11-2017; the Central Government, exempted persons making supplies of services, other than supplies specified under sub-section (5) of section 9 of the said Act through an electronic commerce operator and having an aggregate turnover, to be computed on all India basis, not exceeding an amount of twenty lakh rupees in a financial year.

Thus, persons supplying services other than those mentioned in Section 9(5) of the CGST Act are required to register and collect GST only if their turnover is more than the threshold limit. Persons supplying services mentioned in Section 9(5) are not liable to be registered under GST even if their turnover is more than the threshold limit, as liability to pay GST is on the e-commerce operator.

It is noted that the exemption has been provided from registration itself, and registration provisions are squarely applicable also to IGST/SGST Act, and hence even inter-state supplies are exempt from payment of GST on such supply of service upto threshold limit of exemption.

Thus, persons supplying services through e-commerce operators enjoys threshold exemption limit. However, such benefit is not available to persons supplying goods through e-commerce operators. Such suppliers of goods are required to get compulsorily registered under GST even if their turnover is less than the threshold limit. It means they are required to register before selling through the e-commerce platform. All platforms like Amazon, Flipkart etc. requires GSTIN at time of registration as a seller on their platform.

Commission Charged from Suppliers

E-commerce portals are charging a commission from various suppliers. It amounts to support services, falling under Tariff heading 9985, and shall attract GST at the rate of 18%. E-commerce portals are required to be compulsorily registered under Section 24(ix) of the CGST Act, and shall be paying GST on commission amount received, without availing any exemption threshold limit. The tax shall be charged in the invoices raised against supplier of goods or services; and such suppliers can avail ITC on such GST charged, if otherwise eligible.

Tax Collection at Source

An electronic commerce operator is also required to collect tax under Section 52 of the CGST Act, called TCS. The provision essentially imposes a duty on e-commerce operators to collect tax, from the amount payable to the supplier. Such TCS deducted is reflected in the electronic cash ledger of the supplier. However, the Government has clarified that TCS shall be deducted only when the supplier is liable to pay GST. TCS is not required to be collected on exempt supplies [FAQ on TCS issued by CBIC]. For the purposes of TCS, an e-commerce operator has to obtain separate registration for TCS, irrespective of the fact that it is already registered under GST as a supplier or otherwise and has GSTIN. The section imposes a duty on electronic commerce operators to collect a tax, from the consideration required to be paid to the persons making supplies of goods or services or both through its platform. The deduction shall be done on monthly basis on net value of taxable supplies.

E-commerce portal from outside India

As a matter of general rule, liability to pay tax is fastened only on the persons supplying goods or services, through an establishment located in India. If such supplies are made from a location outside India, the supplier cannot be fastened with a GST payment liability. Supply of goods is a simple example. Say, a foreign manufacturer supplying goods to an importer in India. Though, that foreign manufacturer is supplier of goods, liability to pay GST is not on that foreign manufacturer. GST is paid by the importer located in India at the time of import. Similarly, when supplier of services supplies certain services to an Indian resident, liability to pay GST on such supply is on the person receiving the services under reverse charge method. Thus, when an e-commerce operator is located outside India, in general there is no GST liability on that operator. Goods supplied thorough such foreign located e-commerce portal shall attract IGST at the time of import; and services supplied through such an e-commerce portal shall attract GST on reverse charge method.

Online Information and Database Access and Retrieval Service is an exception to the above said provision. In case of OIDAR service, the liability to pay tax is there even on non-resident supplier of services. The Integrated Goods and Service Tax Act defines OIDAR to mean services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as, – (i) advertising on the internet; (ii) providing cloud services; (iii) provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet; (iv) providing data or information, retrievable or otherwise, to any person in electronic form through a computer network; (v) online supplies of digital content (movies, television shows, music and the like); (vi) digital data storage; and (vii) online gaming. The definition is inclusive and also includes similar services apart from what is enumerated in the definition clause. We can see from the definition itself that that tax has been imposed essentially automated digital services requiring minimal human intervention. A simple procedure has been devised for non-resident supplier of OIDAR services to pay GST.

Impact of GST on online marketplaces