GST: Why Easier Rules For Small Online Sellers May Offer Limited Benefit

The government's decision to exempt small-and-medium sellers from compliance burden for online sales of goods within the state may be a limited benefit. That's because the scheme is not applicable for inter-state sales of goods.

The Goods and Services Tax Council recently decided that small and medium online sellers can avail the composition scheme and exemption from GST registration provided their turnover is within the prescribed limit. Earlier, only offline sellers could avail this benefit.

The composition scheme offers the benefit of paying a certain fixed percentage of the annual turnover as tax.

A registered seller whose aggregate turnover in the preceding financial year has not exceeded Rs 1.5 crore, can avail the scheme. The limit is Rs 75 lakh in some smaller states. However, the seller going for this option forgoes the right to collect GST from customers, issue taxable invoice, and claim input tax credit on their purchases.

A Central Board of Excise and Customs document showed that such taxpayers only has to file a simple quarterly return, and thus avoid maintaining elaborate accounts and records.

Earlier, this scheme was not available to sellers participating through e-commerce platforms. However, to establish a parity between online and offline businesses, the GST Council has included intra-state supplier through e-commerce platforms.

Kavita Rao director at the National Institute of Public Finance and Policy, called the move a teaser. “It doesn't dramatically change anything for local trade but allows to explore e-medium without facing the cost factor.”

GST Exemption

So far, offline sellers got the benefit of GST exemption in case their annual turnover was up to Rs 40 lakh in goods and Rs 20 lakh in services. Online sellers, however, had to register and file returns irrespective of their turnover value.

The GST Council has extended this benefit to online sellers effective Jan. 1, 2023. Online sellers opting for this scheme need not pay the 1% tax collected at source to e-commerce platform.

While this would not dramatically change business, Bipin Sapra, tax partner at EY, said it will give encourage small sellers to sell online as compliance eases.

“TCS not being collected would help as working capital would increase,” Sapra said. The flexibility of lower compliance is good for those operating from homes or through the internet where they often lack the wherewithal to engage a chartered accountant, he said.

This is something the e-commerce industry wanted and representations to the government were put forth to bring parity between online and offline sellers, according to TR Venkateswaran, partner with PwC. “E-commerce operators can now onboard more sellers and offer more products and services hitherto unavailable," he told BQ Prime.

Industry experts told BQ Prime the move is a positive one, though it comes with its own implementation challenges. And that's a reason why the benefit is available on sale of goods and services within a state.

According to an official with knowledge of the matter, the procedural safeguards will include PAN reporting, declaration of place of business, among other requirements, to avoid under-reporting of turnover or splitting of turnover between people with intent of evasion.

“The details of the scheme will be worked out by the Law Committee of the Council," the Finance Ministry had said in a statement. "The scheme would be tentatively implemented with effect from Jan.1, 2023, subject to preparedness on the portal as well as by e-commerce operators."

Abhishek Jain, partner, indirect tax, KPMG India, however, told BQ Prime, the move is a win-win for both suppliers and the government. “The measure will offer new opportunities to the e-commerce platform and vendors as a trade facilitation measure, as many suppliers are hesitant to supply through e-commerce platforms because of GST registration, payment and the compliance complexities involved.”

Also, the authorities will get data to curb tax evasions, he added.

Intra-State Dampener 

The clause to restrict the benefit of GST exemption and composition scheme for intra-state sales is aimed at monitoring the movement of goods as those availing the benefits won't have to issuing GST invoices, according to Rao of NIPFP.

"Unlike an intra-state sale where transactions happen within in one place that a state can monitor, in inter-state the buyer and seller are in different states," she said. "With GST paid at the selling point, if it's not monitored, the tax base would be watered down."

While the clause seals an administrative loophole, it reduces the benefit to sellers, according to Bimal Jain, indirect tax chairperson of industry lobby PHDCCI.

An online shopper in one state can buy goods from a small vendor in another state with the e-commerce operator acting as a facilitator and delivery partner, Jain said. "It is difficult for suppliers or vendors to supply through e-commerce platform and not sell inter-state," Jain said. "Only a small fraction is intra-state supply."

Most vendors and suppliers through e-commerce platforms are engaged in inter-state supply and they won't get the registration exemption or the composition benefit, he said.

Venkateswaran of PwC, however, said this is a good start, but with time, the government will have to ensure the compliance burden remains low. They will also need to take a re-look the inter-state clause, he said.

“The primary purpose is to keep track of unregistered suppliers, and such limits would push them within the ambit of pin code restrictions that e-commerce platforms offer," he said.

But this also means the e-commerce operators will have to beef up their processes, he said. "The conditions would also make them responsible to put the control mechanisms in place, leading to more elaborate entry, on-boarding and monitoring.”