India’s new GST system is designed to make taxes easier, especially for small businesses. But if you run an e-commerce company, the rules are slightly more complicated. To make sure you’re keeping the right records and paying taxes correctly, it’s important to understand how the GST affects your online business.
GST on E-commerce Business Sellers
Mandatory GST Registration for Online Sellers
One of the most important things the GST law did was reduce the taxes on very small businesses. Companies that bring in less than Rs 20 lakh, or Rs 10 lakh in northeastern states, do not need to pay GST. As an e-commerce business owner, this threshold doesn’t apply to you. Under GST, all online sellers must register and pay GST . This means that even if you only bring in Rs 1 lakh, you must go online and get a GSTIN. In addition, you’re required to file monthly returns and pay taxes on all qualified sales.
More Opportunities for Interstate Sales
Under India’s old tax system, it was complicated to sell products across state lines. Each time you did, you had to deal with a variety of different taxes and the complicated paperwork that went with them. For small businesses that didn’t have the budget to pay a tax professional, the possibility of extra sales was simply not worth the hassle. This meant your ability to grow was limited by where you lived.
The new tax system has eliminated all of the confusing interstate taxes and replaced them with a single tax. With GST, you can sell to customers in your own state and in other states, all without worrying about multiple taxes. As a result, you have the opportunity to sell products to customers across India or around the world. It also gives you the chance to compete with big corporations. Although that sounds intimidating, it’s great for you and your customers. After all, as a small business, you may be able to offer more flexible quantities, more personal service, and other perks that can draw shoppers away from bigger suppliers. As a result, GST makes it easier to grow your business without taking on an extra tax burden.
Direct Sellers vs. E-commerce Marketplaces
The way you pay GST depends on the type of online business you run. There are two main types of online businesses. The first uses a direct-sales method, where you buy or make products and sell them to customers through your website. If that’s how you operate, you can simply follow standard GST filing rules.
The second type of online business is an e-commerce aggregator. An aggregator is a website like Flipkart, which connects buyers and sellers and takes a commission on each sale. Since they don’t always sell the products directly to customers, these types of e-commerce businesses must handle GST differently. This happens with a tax collected at source, or TCS. When your website facilitates a sale between a buyer and a seller, GST law requires you to deduct 2% of the sale before you send payment to the seller. You must pay that amount to the government. Then, your sellers can claim that tax as a deduction on their own GST filings.
If you’re an aggregator, both you and your sellers must report all sales to the government. Your reports and their reports must match exactly. If they don’t, your sellers are responsible for the outstanding GST. The TCS requirement helps you spot and remove sellers who aren’t reporting sales accurately.
Ineligibility for Composition Scheme
As part of the GST, the government created the composition scheme. This rule is designed to make it easier for small and medium businesses to pay GST. Instead of filing monthly returns, qualified companies can simply file quarterly and pay a flat tax rate. As an e-commerce business, you are not eligible to participate in this scheme, even if your company meets the revenue requirements. This is because the scheme only applies to sellers who operate within one state.
Better Tax Credits
When you run an e-commerce business, you can take advantage of the input tax credit to reduce your tax payments. Imagine that you pay Rs 100 in GST on raw materials. When you turn those supplies into a product and sell them online, you charge your customers Rs 150 in GST. The government expects you to pay that Rs 150 to them. However, with the ITC, you can deduct the original Rs 100 as a credit. This means you only need to pay Rs 50 to the government.
You can claim the ITC for any products and services your company buys to use in the business. But you must be able to explain exactly how you’re using the things you buy. If you buy T-shirts in bulk from factories and sell them to a screen-printing company, for example, you can claim ITC. If you’re buying a computer for personal use, you cannot claim ITC. When used legally, the ITC can dramatically reduce your tax burden each month.
For many e-commerce business owners, the GST system allows easier reporting and new opportunities for growth. Because the system is complicated for online companies, it’s important to stay up-to-date so you can file correctly and make the most of available credits that can reduce your monthly tax bill.