Indian e-commerce is at a nascent stage and is expected to gain solid growth trajectory in line with global trends. Social commerce and digitizing small kiranas in the neighbourhood across the country are the likely trends to drive e-commerce in tier-2 cities and beyond.
There are around 13 million kiranas in the country, each of which is doing an average of 100-200 transactions a day. The transformation of just 10 per cent of the 13 million kiranas could boost retail consumption by more than 5 per cent and generate approximately 3.2 million new jobs in India, according to a report from Accenture and the Trust for Retailers and Retail Associates of India (TRRAIN).
MSMEs, with 63 million units, constitute about 90 per cent of all enterprises in India, employing over 120 million people and contributing significantly to the GDP. This, however, excludes the millions of small units operating from home such as small boutiques, mom and pop stores etc.—the number of such enterprises is estimated to be over 15 million.
As per rough estimates, the Micro, Small and Medium Enterprises (MSME) account for 30 per cent of the Gross Domestic Product (GDP) and more than 40 per cent of total exports. And yet, 85 per cent of MSMEs are unregistered. MSMEs form the bulk of Indian firms in the formal sector. While over 13 million firms are registered under the Goods and Services Tax Network (GSTN), about 9 million firms are filing GSTR 3B (a self-declaration) currently.
While India is poised for a strong growth in e-commerce, currently less than 10 per cent of India’s 80+ million small businesses sell online (including mom and pop stores), while less than 15 per cent of Indian retail market is organised.
The nascent market in India needs an enabling ecosystem, similar to China, to achieve exponential growth. As more Indians join the entrepreneurship bandwagon, the need to formalize kicks in. Formalization of business in India is happening rapidly, but there are also constraints, the foremost being very small businesses unable to cope with the cost and process of compliance.
Any person who supplies goods through an e-commerce operator is required to compulsorily register under GST, irrespective of their turnover, as per Section 24(ix) of CGST Act, 2017. Accordingly, even where the turnover does not cross the threshold limit, such MSMEs would be required to register under GST and undertake all subsequent compliances under GST.
If the same seller was to establish a brick-and-mortar business, the MSME won’t be required to take a GST registration until the turnover hits a minimum threshold. This discrepancy in procedure puts Digital India at a disadvantage against physical business and disincentivizes setting up electronic businesses.
ALSO READ | India’s Biggest Worry is Jobs and e-Commerce Can Play a Key Role Here
These sellers mainly consist of individuals and small businesses (including homemakers) whose turnover is below the prescribed registration threshold and are therefore not currently registered under the CGST Act. This also creates disparity as offline suppliers are exempt from GST registration up to a turnover of Rs 40 lakh.
Meesho, a social commerce platform, with a supplier base of 1 lakh suppliers testifies that it has to reject more than 70 per cent of small suppliers due to the issue of GST registration. Else their supplier base would have been 3 times more.
What Can be Done
There is a need to relax the GST requirement for online MSMEs. In the spirit of promoting Digital India and not placing it on a lower pedestal than the brick-and-mortar businesses, let any MSME irrespective of whether they sell offline or online be liable for GST only at the threshold value.
Alternatively, we may allow the e-commerce operator to discharge the GST on behalf of MSMEs that have a turnover below the prescribed threshold, and do not have a registered GST number and are supplying goods through the e-commerce platform, under the ambit of section 9(5) of the CGST Act. The e-commerce platform shall collect and pay GST at flat 5 per cent on all the eligible products of the small suppliers selling online u/s 9(5) of the CGST Act.
In case the supplier is covered under section 9(5), then the online MSME need not require GST registration under section 24 (ix). Alternatively, if the supplier is still required to register under GSTN, they should be exempted from filing monthly GST returns.
If the e-commerce operator is made liable for discharge of GST on the goods sold on its platform, there is no question of tax evasion. This would increase the indirect tax collection of the government as hitherto excluded goods from GST taxation would now be taxed at a prescribed rate by the e-commerce operator.
This is in line with similar relief provided to specific categories of service providers making supplies through e-commerce platform under section 9(5), wherein all the provisions of the CGST Act shall apply to the e-commerce operator who is liable to pay tax in relation to the supply of such services while the supplier is not required to register under GSTN. Currently the three services notified under section 9(5) of CGST are:
1. radio-taxis (e.g. Ola/ Uber platform);
2. hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes except where the person supplying such service through e-commerce operator (e.g. Oyo Rooms, Makemytrip) is liable for registration under section 22(1) of the CGST Act;
3. housekeeping such as plumbing, carpentering etc., except where the person supplying such service through an e-commerce operator (e.g. Urban Clap) is liable for registration under section 22(1) of the GCST Act.
Periodic Compliances
MSMEs operating through e-commerce operators are burdened with periodical compliances like monthly returns, reconciliation of TCS (tax collected at source) amounts, etc. Further, considering that MSMEs may be undertaking compliances manually without any technology aid, it poses challenges in terms of undertaking reconciliations, keeping track of the TCS collected and remitted, credit reconciliations, etc.
Someone who has only seen/accessed internet via mobile phone finds it difficult to deal with the processes and the website complexity. Unfortunately, the GST process, navigating the website and filing returns regularly is quite cumbersome, which acts as a major deterrent for small and mid-sized sellers to start or expand their businesses through e-commerce platforms. Thus, these suppliers continue to sell offline and are unable to leverage the wide access/market reach provided by e-commerce platforms. This also results in loss of indirect tax revenue for the government as growth is constrained.
Notably, the hesitation of small businesses to register under GSTN is not to evade tax but to avoid the cumbersome and time-consuming registration and returns filing process. It would be, therefore, prudent for the government to simplify the entire GST process and website in the interest of all suppliers, online as well as offline. The lengthy and complex process becomes burdensome and instead of facilitating and empowering businesses, it acts as a deterrent and hindrance for the businesses to initiate, grow and thrive.
Udyam Aadhaar registration (the Aadhaar for businesses) can be made mandatory for all suppliers selling online. It can be used to track business levels of online suppliers.
The intention of the government behind introducing a threshold limit for registration was to reduce the burden on such MSMEs. But bringing every MSME supplying through e-commerce operators under the GST registration net does not hold good with that intent.
As a pioneer in digital payments revolution, India can integrate small suppliers and entrepreneurs along the length and breadth of the country with social commerce and e-commerce, tapping markets and customers, and dissolving geographical boundaries. The government should wholeheartedly encourage and provide a supportive regulatory framework to social commerce and e-commerce platforms, in India’s quest to achieve a $5 trillion economy.
The author is the Head of Research at Smahi Foundation and a public policy expert based in Mumbai. Smahi Foundation has recently released its report, ‘B-Commerce Soars; Digitizing India’s Storefront Retail’. The author tweets @Ritu_twt. The views expressed in this article are those of the author and do not represent the stand of this publication.
Read all the Latest News, Breaking News and Coronavirus News here.
Comments
0 comment