Collection of Tax at Source under GST Law – When Required

Frah Saeed

Co-founder Clearmytax.in

1. INTRODUCTION

The requirement to collect tax at source under Section 52 of the CGST Act,2017 is not applicable to all persons. Such collection of tax at source is required to be made only by electronic commerce operators (ECO) and that too only in some situations. As per Notification No. 51/2018-CT, dated 13-09-2018, the effective date of applicability of TCS provisions is 01-10-2018. Further in cases where provisions of TCS apply, and supplies are inter-State , IGST @ 1% is required to collected by the ECO else CGST @ 0.50% and SGST @ 0.50% is required to be collected on net value of taxable supplies. Needless to mention here that credit of such amount collected at source can be availed by the supplier.

E-Commerce sector, in India has seen a meteoric rise and is a milking cow for the Government as far as indirect taxes are concerned. Further there are primarily three business models under which the e-commerce operators run their businesses. Out of these three models, TCS provisions should normally be applicable in only one of them. The business models as well as provisions in this regard as mandated under GST Law are discussed in the succeeding paras.

2. SITUATIONS WHERE COLLECTION OF TAX AT SOURCE IS REQUIRED

As per Section 52(1) of the CGST Act, 2017, the collection of tax at source is required to be made by every electronic commerce operator, not being an agent in respect of supplies made through it by other suppliers where the consideration with respect to such supplies is to be collected by the operator.

Thus, in view of above, collection of tax:

1. is required to be made by every electronic commerce operator (refer para 2.1)

• not required if electronic commerce operator is acting as agent (refer para 2.2)

• is required in respect of supplies made through it by other suppliers where the consideration with respect to such supplies is to be collected by the electronic commerce operator (refer para 2.3)

Collection of tax at source is without prejudice to any other mode of recovery from the operator

In terms of Section 52(2) of the CGST Act, 2017, the power to collect the amount specified in Section 52(1) shall be without prejudice to any other mode of recovery from the operator. This means that the general provisions of demand and recovery as contained in Chapter XV of the CGST Act,2017 will equally apply to an electronic commerce operator and recovery of any amount due from such operator can be made by the Department by invoking such provisions.

2.1 Tax is required to be collected by an Electronic Commerce Operator

The responsibility to collect tax at source has been casted only upon electronic commerce operator. In this regard specific definitions of ‘electronic commerce’ and ‘electronic commerce operators’ and has been provided in section 2(44) and 2(45) of the CGST Act,2017 which are tabulated below:

2.1a Essential ingredients of Electronic Commerce Operator

If we analyse the definitions of the electronic commerce and electronic commerce operator as stated in the above table, the following essential ingredients of electronic commerce operator appears:

• Supply over digital or electronic network. In cases of electronic commerce physical presence of buyer and seller is not required at a single place and the deal is struck over the digital or electronic network through website or mobile applications.
• The person should own, operate or manage the platform. The Electronic Commerce Operator should own, operate or manage the digital or electronic facility of platform.
• It should be used for electronic commerce which is defined at Section 2(45) to mean the supply of goods or services or both, including digital products over digital or electronic network.

As per Wikipedia, e-commerce is a transaction of buying or selling online. Electronic commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems. Modern electronic commerce typically uses the World Wide Web for at least one part of the transaction’s life cycle although it may also use other technologies such as e-mail. e-commerce businesses may employ some or all of the following:

• Online shopping web sites for retail sales directly to consumers

• Providing or participating in online market places which process third-party business-to-consumer or consumer-to-consumer sales

• Business-to-business buying and selling

• Gathering and using demographic data through web contacts and social media

• Business-to-business (B2B) electronic data interchange

• Marketing to prospective and established customers by e-mail or fax.
• Engaging in pretail forlaunching new products and services

• Online financial exchanges for currency exchanges or trading purposes.

2-2 Tax is not required to be collected by an e-commerce operator acting as an Agent

It has specifically been stated that collection of tax would be required by every electronic commerce operator who is not an agent. Thus, in case an electronic commerce operator is acting as an agent in the supply of goods or services or both, such an operator would not be required to collect tax at source. In view of above it is of critical importance that we understand the meaning of ‘agent’ under GST Law. Alongwith the term ‘agent’ the definition of term ‘principal’ on whose behalf the agent acts, is also important. The definitions of agent as well as principal are tabulated below:

2-2a Essential ingredients of an Agent

Following attributes are essential for anyone to be regarded as an ‘agent’.

1. An “agent” is a person.
2. carries on the business of supply of goods or services or both on behalf of another or
3. carries on the business of receipt of goods or services or both on behalf of another
4. An agent could be any of the following
5. a factor,
6. broker,
7. commission agent,
8. arhatia,
9. del credere agent,
10. an auctioneer or
11. any other mercantile agent, by whatever name called.

• There must be two persons i.e. an agent and the principal i.e. other person whose behalf agent acts.

The definition of agent as above seems to illustrate the principle of agency defined in Section 182 of the Indian Contract Act, 1872. Agency is a relationship that can be formed validly even without consideration in terms of Section 185 of the Indian Contract Act, 1872.

Agent can work purely on commission basis. Though in light of the business models under which e-commerce companies normally operate (refer para 3.3) such operators may not be covered under the term agent, however in each case their business model needs to be analysed to see whether they are operating as agent or not and in case they are operating as an agent for any supply, tax would not be required to collected by them.Care must be taken to identify whether the parties intended to constitute an agency as understood in law and in case it is not the intention the parties will not be regarded as principal and agent.

2.3 Supplies are made through e-commerce operator’s portal / website by other suppliers where the consideration with respect to such supplies is to be collected by the operator

Normally electronic commerce operator like Amazon, Flipkart, Snapdeal,Craftsvilla, Ebay, Pepperfry etc, hosts the details of goods or services or both of the suppliers who want to make supplies, on their web-site/e-portals etc. Prospective customers visit their portal, place the order for the goods services or both they intend to buy/receive and make payment which is received by the Electronic Commerce Operator (ECO) in his name but on behalf of supplier of goods or services or both. Electronic Commerce Operator in turn makes payment to supplier of goods or services or both after deducting their fees for facilitating such supply of goods or services or both. In such cases supplier of goods or services or both supplies the goods or services or both directly to the customers. Thus, in such cases the invoices are raised by the supplier of goods or services or both in the name of the customer. For detailed discussion of above business model kindly refer to para 3.3.

As in above cases the supplies are made through e-commerce operators portal / website by other suppliers where the consideration with respect to such supplies is to be collected by the operator, the TCS provisions as mandated under section 52 of the CGST Act,2017 shall be invoked and therefore such operators would be required to collect tax at source.

3 Main Business models under e-commerce and applicability of TCS provisions thereon

From the point of view of supply of goods or services or both and particularly with respect to collection of tax at source, it’s imperative that we understand how goods or services or both are supplied over digital or electronic network under various business models. Some of the important business models through which goods or services or both are supplied over digital or electronic network are discussed as under:-

3.1 Goods or services or both are supplied directly by the supplier of goods or services or both over their Digital or Electronic network – Provisions of TCS will not apply

Under this business model, supplier of goods or services or both supplies their goods or services or both directly to the customer on their web-sites/e-portal. Suppliers host the details of their products/goods on their respective web-sites/e-portal. Prospective customers visit the web-site/e-portal of the suppliers and place the order for the goods or services or both they intend to receive and make payment as per the options available on the web-sites /e- portal which may be through any digital mechanism or option of cash on delivery is also available in some cases. Thus, payment in such cases may be in advance, at the time of placing the order or at the time of delivery. Suppliers supply the goods or services or both directly to the customers. This is the simplest model and is often known as direct selling model, in this case the supply invoices are directly issued by the respective suppliers in the name of receiver of such goods/products.

To illustrate Titan Company Limited selling its ‘Titan’ brand watches through its own E-commerce portal. Under GST law these supplies shall be treated as normal supplies and will be subject to GST based on the nature of supply i.e. intra-State of inter-State.

Further as regards TCS is concerned,such provisions would not be applicable in view of fact that in this model, supply is being made by ecommerce operator of its own e-portal / website and other supplier is not involved. It has already been discussed earlier that as per Section 52(1) of the CGST Act, 2017,the collection of tax at source is required to be made by every electronic commerce operator, not being an agent in respect of supplies made through it by other suppliers.

3.2 Electronic Commerce operator receiving and supplying Goods or services or both on Their Own Account i.e. inventory model – Provisions of TCS will not apply

Under this business model, three parties are generally involved namely electronic commerce operator (ECO), supplier of goods or services or both and receiver of goods or services or both. ECOs operating the web-site/e-portals and similar other digital or electronic network, receives inward supply of goods or services or both from the supplier of goods or services or both in their own accounts. Such operators hosts the details of such goods or services or both on their web-site/e- portals etc. Prospective customers visit their portal, place the order for the goods services or both they intend to buy/receive and make payment as per the options available on the web-site/e-portal which may be through any digital mechanism or option of cash on delivery is also available in some cases. Thus, payment in such cases may be in advance, at the time of placing the order or at the time of delivery.

ECOs supplies the goods or services or both directly to the customers. This is the simplest model and is often known as direct selling or inventory model. Thus, in this model, sales invoices are raised by the electronic commerce operator operating web-sites/e-Portals etc. in the name of customers. Suppliers of goods or services or both issue invoices in the name of the Electronic Commerce operators as they are engaged in receiving inward supplies and making supplies on their own account.

To illustrate Godrej Consumer Products Limited selling its Godrej Aer car perfume gel through Amazon. In this case Godrej will issue the invoice in the name of Amazon i.e. ECO who in turn will issue the invoice in the name of customer who has placed the order on its web-site/e- portal. These supplies shall be treated as normal supplies and will be subject to GST based on the nature of supply i.e. inter-state or intra-State. GST will be paid by the electronic commerce operator on the consideration received from the ultimate customers after availing the tax credit as per the provisions of GST laws. Supplier of goods or services or both shall discharge their tax liability for the supplies of goods or services or both made to ECO after availing the benefit of tax credit as per the provisions of GST laws.

Further as regards TCS is concerned, such provisions would not be applicable in view of fact that in this model, supply is being made by ecommerce operator of its account through its e-portal / website and other supplier is not supplying through such platform. It has already been discussed earlier that as per Section 52(1) of the CGST Act, 2017, the collection of tax at source is required to be made by every electronic commerce operator, not being an agent in respect of supplies made through it by other suppliers.

3.3 Web-site/e- Portals Providing Market Place to supplier of goods or services or both – Provisions of TCS will apply

Under this business model also three parties are generally involved ECO, supplier of goods or services or both and receiver of goods or services or both. Electronic commerce operating web-site/e-portals and similar other digital network provides their web-sites/e other digital or electronic network to supplier of goods or service or both or showcase of their goods or services or both to the public at large. These portals facilitate supplies of goods or services or both between the customer of such goods or services or both and the supplier of such goods or services or both. Amazon, Flipkart, Snapdeal, Craftsvilla, Ebay, Pepperfryetc, are some of the business players working under this type of business model.

ECO hosts the details of such goods or services or both on their web-site/e-portals etc. Prospective customers visit their portal, place the order for the goods services or both they intend to buy/receive and make payment as per the options available on the web-site/e-portal which may be through any digital mechanism or option of cash on delivery is also available in some cases. Thus, payment in such cases may be in advance, at the time of placing the order or at the time of delivery. Such payment is received by the ECO in his name but on behalf of supplier of goods or services or both. ECO in turn makes payment to supplier of goods or services or both after deducting their fees for facilitating such supply of goods or services or both. Supplier of goods or services or both supplies the goods or services or both directly to the customers. Thus, in this model, invoices are raised by the supplier of goods or services or both in the name of the customer.

To illustrate Godrej Consumer Products Limited selling its Godrej Aer car perfume gel through Amazon. Godrej will issue the invoice in the name of customer who has placed the order on the web-site/e- portal of Amazon. These supplies shall be treated as taxable supplies and will be subject to GST based on the nature of supply i.e. intra-State or inter-State. GST shall be paid by the supplier of goods on such supply of goods or services or both. Electronic commerce operator will also discharge his tax liability on the consideration received from supplier of goods or service or both for facilitating such supply.

As in case of this model the supplier is supplying goods or services or both through the e-portal / website of the e-commerce operator and therefore the provisions of Section 52 of the CGST Act, 2017 would be triggered and tax would be required to be collected at source.Further in this case as the supply is directly being made by the supplier through the e-commerce operators website / portal, such operator cannot be regarded as an agent in order to obviate need of collection of tax at source.

3.3-a Multiple ecommerce model

In some situations, multiple e commerce operators are involved in a transaction and question may arise as to which ecommerce operator will collect tax at source. In such cases the collection of tax would be required to be made by the ecommerce operator who is making payment to the supplier for the supply made through it.

In regard to above, the Law Committee, GST Council had on 28-09-2018 issued FAQs on TCS under GST, out of which Q.No 28 is relevant here which is reproduced below:

Under multiple ecommerce model, Customer books a Hotel via ECO-1 who in turn is integrated with ECO-2 who has agreement with the hotelier. In this case, ECO-1 will not have any GST information of the hotelier. Under such circumstances, which e-commerce operator should be liable to collect TCS?

TCS is to be collected by that e-Commerce operator who is making payment to the supplier for the particular supply happening through it, which is in this case will be ECO-2.

4. Concluding Remarks

From the deliberations made in this article it should be clear to the readers as to in which situations the Electronic Commerce Operator is required to collect tax at source under Section 52 of the CGST Act,2017. Just to add on that apart from the aspects touched upon in this article, there are further certain situations where TCS provisions don’t apply. Based on comments upon this article, our team will cover the remaining aspects of TCS in a subsequent article.

Readers are requested to provide their comments on above article. This will encourage our team to write more such threadbare articles. Further any query may be asked on ‘your gst query’ tab on home page or can be mailed to clearyourgstdoubts@gmail.com

Frah Saeed

Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.