The blue-eyed boys of the India growth saga, e-commerce companies lately seem to be facing a rough ride. The latest in the slew of setbacks is the proposed Goods & Service Tax (GST) announced by the government on June 14th2016.
While the adoption of GST is imperative for the country,since it’ll simplify the tax structure of the country and ensure uniformity, there are certain clauses that will prove detrimental for the e-commerce sector and put it on the back foot.
Why e-commerce is important for India
As an economy, India is largely dominated by the services industry, which contributes more than 52% to the GDP of India. In fact, over the last half decade, the meteoric rise of e-commerce companies has only added to the momentum.
According to aneTailing India study, India's e-Commerce revenue is expected to witness a whopping 51% jump (the highest in the world) from $35 billion in 2016 to $120 billion in 2020. The growth can mainly be attributed to the country’s increasing Internet penetration, young demographic profileand relatively better economic performance as compared to other countries.
The high growth trajectory of e-commerce in India has been possible due to rapid technology adoption with use of smartphones, tablets etc and better access to Internet via broadband and 3G. Moreover, the growth showcased by homegrown venture likes Flipkart and Snapdeal, which have received substantial investor interest and participation from across the world; which highlights the immense potential of the e-commerce market.
Even though the big e-commerce players have been posting substantial revenues year on year, the industry at large is still in its nascent stage. The country still falls short behind other countries where e-commerce is a big GDP contributor, but with infrastructural improvements (internet penetration in remote areas mainly), the industry would be able to reach maturity soon.
For a segment of the economy, which has the potential to become bigger and better, it is imperative for decision makers to give it impetus rather than clipping its wings.
How the GST inclusion will hamper e-commerce players?
Even though the proposed GST regime is necessary to address the tax discrepancies prevalent across states and across goods and services in the country, the adoption of GST clause is giving sleepless nights to e-tailers across the country.
E-commerce companies that follow the marketplace model are the ones who are under duress, thanks to the clause related to tax collection at source. Due to the infancy of the industry and intense competition among players, most sellers in the country are working on very thin margins while selling their products and/ or services.
The woes of the e-tailers do not end here. As per leading lawyers in the country, e-commerce companies,mainly follow generic bookkeeping practices, which are set to become even more complex once GST is implemented. With the new set of guidelines of GST in place, e-commerce companies will face issues when there are cases of returned goods. The entire accounting process will have to undergo a 180-degree change in order to include the new GST rules in its ambit.
Additionally, the biggest pain point for e-commerce players is that the GST notification does not address how the government plans to impose GST on peer-to-peer platforms like Quikr and Olx.
Last, but certainly not the least, the big issue for Indian e-commerce player is the impact on discounts and freebies. Most e-commerce players have thrived so far in India based on the heavy and recurring offers and discounts for customers. Until now, the e-commerce player could offer a discount or freebie as per their choice, but since under the GST regime freebies are expected to be taxed, it’ll put additional burden on the sellers. As a result, e-commerce companies might shy away from offering huge discounts that will have a direct bearing on their customer base.
Also, even if the e-commerce player decides to sell an item on discount, it will have to pay the tax on the discounted price since it has purchased the goods from the supplier, hence bearing the extra tax burden on its own.
At the time when the Indian startup scene is on an upward spiral, the government ought to find the means to sustain or further accelerate this growth. With e-commerce forming a significant chunk of startups in the country, it is all the more crucial that the government weigh its steps with caution, lest it falters and puts the thriving e-commerce sector in jeopardy. This will only discourage many other aspiring entrepreneurs and possible investors and stakeholders who have been looking at India as the new investment hub, to look for greener pastures elsewhere. As a result, all the effort and resources that have gone into initiatives like ‘Make in India’ will only prove counter-productive and make us look like hypocrites.
So the government must consider all the pros and cons before implementing GST and make the necessary changes before it gets too late and costs the etailers, and hence, the economy, dearly.
Authored By: Ashish Jhalani, eBusiness Mentor & Strategist