Amidst the global pandemic, growth in the e-commerce world has been catapulted exponentially. In India, with increased internet and smartphone usage in urban and rural landscapes, the e-commerce space is poised to grow to $200 billion by the year 2026, according to industry studies.
E-commerce has changed the business landscape, fuelling consumption by giving access to end-consumers and creating new job opportunities.
Growth in this sector in India has been boosted by the pillar initiatives taken by the government on technology and digitisation, which has led to tremendous technological innovations, data analytics capabilities, new modes of digital payments online wallets and the development of local logistics support.
The tax and regulatory landscape in India has been evolving consistently and has undergone changes to keep pace with the explosive growth we are witnessing in the e-commerce space.
The e-commerce space has been closely monitored by the tax regulators, with ever increasing requisitions on transactional data from e-commerce operators, with an aim to protect consumer interest and that of brick-and- mortar retailers.
The intent is to study the footprint of the e-commerce space on the tax and regulatory environment, due to its complex nature and multitude of transacting companies.
The government has made a number of changes to the FDI norms, Income Tax provisions and GST laws in line with the same.
These include an embargo on inventory ownership by an e-commerce entity, regulations on trade practices, and a prohibition on e-commerce entities on directly influencing the sale of goods services, as well as a tax collected at Source TDS by suppliers making sales online on e-commerce platforms, and separately TCS and 9 5 provisions under GST laws.
One of the most debated issues is the impact of the Equalization Levy, introduced in the Union Budget 2020. A simple interpretation of the scope of the Equalization Levy would mean that it would apply to transactions facilitated online, with its wide ambit, its impact includes those supplies for which orders are placed through emails or on the ERP.
It is an industry expectation that a few qualifiers would be introduced to this levy, limiting its extent. It would be important to clarify the fate of the Equalization Levy, because of the impending introduction of the BEPS Pillar 1 approach in 2023.
On the indirect tax front, one of the biggest areas of concern is the growing list of services on which the tax burden has been shifted from the actual supplier to the e-commerce operator.
This provision saddles e-commerce facilitators with additional tax compliances in almost every state of India and increases the cost of services, causing disparity.
Non-AC vehicles, for example, would be taxable if booked through an online portal, and also services of restaurants. This would lead to new operational challenges such as partial billings, billing at differential rates, amongst others.
Other problems affecting e-commerce operations, especially those in overseas, have been the application of TCS provisions and Online Information Database Access and Retrieval OIDAR liability.
The TCS and e-commerce operators have a lot of issues with transaction data reconciliation, as well as state-wise registrations. Separate OIDAR service providers aren't provided any benefit of offsetting the benefit of Input Tax Credit ITC of expenses related to Indian transactions, while expected to discharge the OIDAR tax liability.
There are provisions under Section 194 - O of the Income Tax Act that require e-commerce operators to withhold taxes at the rate of 1 per cent on payments made to sellers using the platform for selling goods services.
The provisions of the TDS do not distinguish between resident and non-resident taxpayers. The provisions are quite cumbersome for operators and cast a heavy compliance burden.
The tax authorities have been under the radar of the e-commerce businesses through several enquiries assessments audits. Despite the distribution of taxpayers between central and state governments, there have been many instances where taxpayers have been subject to overlapping inquiries by the central tax and state tax offices.
The Consumer Protection Act and Rules are to be amended and specific rules are being introduced to regulate e-commerce entities in a stringent manner.
It is understood that a specific e-commerce policy is going to be released soon, which may lay down other nuances and regulations that would help in clearing a lot of issues.
It is the industry's responsibility to have specific guidelines issued by the government that lay down contours for carrying out business by both e-commerce and brick and mortar world.
The e-commerce industry has been racked with multiple tax compliances across both direct and indirect taxes and has been facing constant business disruptions due to an evolving tax and regulatory space.
The tax and regulatory perspective of the e-commerce world and brick-and mortar world can hinder the growth of the e-commerce space.
Amarjeet Singh, Partner and Head, Emerging Giants and Startups, KPMG India, Anshul Aggarwal, Partner, Indirect Tax, KPMG India and Shreya Tripathi contributed to this piece.