The impact of GST on Digital India – The future of SMEs on online marketplaces

While the influence and effectiveness of GST on the economy of India will still take some time to be reviewed under the light of facts, it would be interesting to know the immediate effects of GST on fast growing business sectors of India.

One such sector is Digital Services. Let us see how will it affect the SME (Small and Medium Enterprises) selling their products on online marketplaces.

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The healthy growth of e-commerce

In a study conducted by Internet and Mobile Association of India, it was estimated that the e-commerce of India has crossed the milestone figure of 200,000 crores and reached a whopping 211.005crores in December 2016.

If the claims in the reports are something to go by the total revenue generated by eh online retail industry of India will touch $100 billion by 2020.

Before going further, let us have some introductory points associated with online marketplaces in India:

  • A surge in online marketplaces is proved by the legendary success of yesteryears start-ups like Flipkart, and Snapdeal as well as the entry of global leaders like Amazon.
  • These marketplaces generally charge the sellers either a commission on the products sold or a subscription fee.
  • Online marketplaces offer the sellers a fully managed digital store to display and sell their products.
  • Customers enjoy the triple benefit of competitive pricing, easy comparison ecosystem and ordering the product with a few clicks.
  • Some of the marketplaces offer the facility of managed fulfillment centers the ship the products to the end clients while many of them require the merchants to ship the items directly to the clients.
  • In order to further enhance the E-commerce business model in the country, the government also allows the FDI.

impact of GST

Impacts of GST

Mandatory GST registration

Though the other businesses need not bother registering with the GST until or unless they cross a certain turnover threshold, the case of e-commerce sellers is different. The turnover factor remains out of the equation when it comes to GST registration in case of e-commerce resellers.

All the e-commerce resellers have to register themselves under GST irrespective of their total turnover.

No Composition Scheme

In order to facilitate the growth of SME enterprises, there is a provision of composition scheme under GST Law. The scheme allows the SMEs to enjoy the almost unaffected growth by offering those dual benefits- filing the quarterly (instead of monthly) returns and rendering nominal tax rates at 2% or less.

However, the SMEs involved in e-commerce businesses are excluded from this scheme.

TCS (Tax Collected at the Source)

There is another mechanism attached to GST in the context of online marketplaces. Known as TCS (Tax collected at the source) this mechanism made to mandatory for the online marketplace to deduct a prescribed percentage of total amounts that represent the GST liability of the seller.

The amount needs to be deposited with the government. In order to claim the TS credit collected by marketplace operator, the seller needs t file monthly return under GST law. Understandably it will have a major impact on the liquidity for the SMEs that play a vital role in small business.

Useful advice for SMEs with limited capital and experience

  • To start with complete your GST enrolments now. Here are the details of the enrollment process
  • The effect on liquidity is inevitable and the only way out is to redesign your logistics and effective inventory management. Sort out the items according to the saleability and current demand. Be cautious of introducing any new items for now.
  • Revise your orders in waiting and halt any heavy orders if possible. Avoid buying in bulk until the full impact of GST on your business is clearly apparent. In short, try to be as modest in your business operations as possible. Focus on fundamentals rather than assuming any innovative business models.
  • Erroneous calculations can present a false picture of your business potential. A paradigm shift in the business model has a definite effect on your profits and costs. So, replace your calculators and other relevant resources with the GST compliant products so that you should have an actual picture of your business potential n the light of GST.

Hope you like this article.