Posted in Finance Articles, Total Reads: 1035
, Published on 28 November 2015
The evolution and rise of E-Commerce industry in India has always been remarkable. Significant progress in technology and the ever increasing usage of personal computers, cell phones and internet connectivity have completely transformed the way companies do business. E-commerce stands among a very few sectors that have leveraged this technology to the best possible extent in the past few years.
In spite of being the world’s second largest internet user base, the penetration of E-Commerce in India is still considered low. However, the industry is believed to be at the inflection point which is yet to see very good days in the near future. As of today, the size of the E-Commerce industry is reported as $20 billion. A recent report released by the company Goldman Sachs says that the Indian E-Commerce industry is estimated to cross $300 billion by the year 2030 which is 15 times the current value. This cannot be denied considering the fact that the industry is witnessing nearly six million new customers every month.
On the other hand, one of the most happening issues in India, the GST bill (Goods and services tax bill) which is said to revolutionize the current tax structure has brought in more interest on its impact on the Indian E-Commerce industry. Therefore, this tax system became the most awaited one for the E-Commerce companies, especially for those in the retail space.
Since most of the E-Commerce retail firms offer their products to their customers across the country but have their warehouses only in a select few states, the introduction of GST is believed to alleviate the confusion between the states to tax the firms. The present tax system is an origin based tax system in which the tax is being levied on the products in the states where their warehouses are present. As a result, the states in which the companies have their huge customer base are considered to be at a disadvantage. In this context, there have been cases where some states have come up with their own set of rules and regulations to tax these E-Commerce firms. This led to the tussle between the E-Commerce firms and various state governments as the firms had to end up paying the tax multiple times.
This is where GST is believed to provide some pragmatic and lucid solutions to the problems at hand. Since GST is a tax based on the consumption and destination of goods, the respective states with the customers of these firms will be benefitted from this structure. Also, the origin states are provided with 1% additional tax for two years to compensate their losses. Hence this can be considered a relief for the E-Commerce firms that have been facing problems with multiple taxes. The companies are also hopeful that the new tax structure would address the problems related to their business models. There have been cases where the companies that just act as a market place for various sellers to sell their goods are expected to pay the tax on the behalf of sellers. The firms with these kinds of business models are considered as “Agents” of the sellers and are thereby enforced to pay the tax. So, these companies are awaiting the new tax structure in which a positive move towards this issue would be a great deal to them thereby allowing them to implement innovative business models.
Since it is a well-known fact that most of the E-Commerce companies including biggies like Flipkart and Snapdeal are running under losses and are yet to make profits, GST which subsumes taxes like excise duty, entry tax, service tax, etc. will not be a cost anymore. As a result, the cost for the firms on their procurement front is expected to reduce considerably thereby making the firms improve their profitability. However, the limitation would be on the customers’ front. Higher GST rates may lead the firms charge higher prices on their products which might ultimately impact the customers’ price sensitivity.
While the simplification of the tax structure is a boon to the industry, the companies must make themselves ready to align along the upcoming tax structure which not an easy task. All the E-Commerce firms today are only required to take care of VAT related issues with the supply states. But post the introduction of GST, the firms due to their operations across India, need to enhance their compliance to pan India product destinations. However, by gearing up for these requirements regarding new tax system in India, these firms must realize that the consolidation of their ware houses and resolving their supply chain issues as the biggest advantages. The firms will certainly have the benefit of establishing their warehouses across India based on the business requirements rather than the tax reasons.
While a lot has been said regarding the advantages of GST for the E-Commerce firms, there is a flip side to these arguments. The possibility that GST would increase the inventory holding costs of the companies and demand a greater working capital from them cannot be ruled out. As per the current structure of GST bill which is yet to see the light, the E-Commerce firms are mandated to pay the taxes for the goods that are accumulated in their warehouses. So, the firms end up paying the tax even if the goods are not sold. As it typically takes a couple of months to clear these goods, this will ultimately result in increased working capital for the firms as they have to pay the tax well before the goods are sold. Hence, there is a very high possibility that this tax levied would certainly exceed the current Excise tax paid by the companies.
As the firms are still mulling over solutions to deal with this problem, the best practice could be to optimally manage their warehouses and refrain from unnecessary transportation of the goods in between the states which might result in increased taxes.
This article has been authored by Srujan Kottakota from Indian Institute of Management Udaipur (IIM Udaipur)
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