Equitable Taxation to Propel Towards a Five Trillion Economy in the Era of Digital Businesses

There is no doubt that taxation is an inherent part of revenue generation by governments to meet their obligations in areas like health, education, agriculture and defence of the country. At the same time, rational growth-oriented, practical taxation is equally an important need of the hour. Taxation, which improves the quality of life and places less burden on fossil fuels creating a healthier environment. 

Taxation needs to be predictable, equitable and must not be seen to be taxing the success of an industry in perpetuity, resulting in less money to invest in the hands of entrepreneurs, especially those operating with wafer-thin margins. Such a situation could result in higher borrowing costs, further straining investments. Borrowings might result in over-leveraging, affecting the banking system with increased NPAs. Therefore, during this time of economic slowdown, taxation has to be reactive, predictive and conducive for the overall growth of all sectors. 

The advances of the Indian economy are laden with the success of industries who have contributed immensely to its trajectory of growth. However, certain sectors, including those critical to the Digital India Mission, have been likely subjected to non-conducive taxation policies, seemingly to protect Indian E-commerce players as well as offline sellers.  Such an approach runs contrary to the growth orientation if viewed from the size of the pie. The ones that have borne the brunt are in e-commerce, and the root sector of all internet businesses, telecom. 

E-commerce has contributed immensely towards alleviating the pains of the pandemic and repeated lockdowns. E-commerce marketplaces have helped new and emerging MSME players by helping them digitise and streamline their businesses towards revival. However, its growth could have been even higher, but for some restraining factors under India’s tax administration. Online businesses bring with them certain intangible benefits towards lowering of carbon emissions, lesser depends on fossil fuels, and most importantly and certainly improved quality of life. 

The prime candidate is the decision to impose Tax Collected at Source (TCS) on supplies made through e-commerce operators at the rate of 1 percent on net value. TCS is an avoidable levy imposed on small traders who are now adopting technology for survival. It has not only created an additional layer of compliance burden for online sellers, it also imposes working capital constraints. Moreover, excess TCS collected for online sellers with low margins, and the delay in receiving refunds creates serious challenges for online sellers. Such anomalous situations are contrary to India’s digital aspirations. It would be more pertinent to remove any disparities between online and offline selling, because of the long term benefits of the online selling. The government should reconsider and revisit the imposition of this levy, lest it is perceived by the outside world as a deterrent to encourage online selling.  

Mandatory registration under GST with no threshold limit for online sellers is another example of disparities between offline and online selling. Whereas offline sellers have a threshold of INR 40 Lakhs for offline sale of goods, the online sellers have no such privilege or limit.  Such disparities between online and offline sellers should be ironed out at a time when the economy needs to propel the transition towards digital platforms to help businesses survive. 

E-commerce players need to have warehouses, where goods are stored, which are constraining for the growth of the sellers beyond a particular region due to increased compliances. The benefits of the composition scheme under GST should be made applicable to online sellers as well on par with offline sellers, who enjoy lesser compliance, limited liability and higher liquidity. This is discouraging to traders who aspire to digitise their businesses, as many of them may think that moving online amounts to more registrations, excess compliance or delays in getting refunds. Such inconsistencies in the GST should be taken care of to promote the growth of the MSME sector, particularly those who would like to sell online.

No doubt that Indian e-commerce businesses must be encouraged to grow, however, the equalisation levy imposed by the Indian tax administration on non-resident e-commerce companies also creates artificial barriers for e-commerce marketplaces to grow in India. E-commerce is still in a relatively nascent stage in India. Many players are investing heavily in warehousing, logistics and other aspects of the ecosystem. Limiting their ability to do so will on lead to decreasing the innovation and job-creation potential of the sector. 

The pie is big enough to be shared, both by homegrown Indian entrepreneurs as well as MNCs in the market place. Equally, the market is big enough to be shared between online and offline sellers, but taxation must not be a restraining factor for the growth of one at the cost of others.  It is also manifest from the fact that online business is minuscule of offline, because of connectivity and lack of penetration of smart devices. We have a long way to go. Needless to say, we must not resort to placing artificially a regime, which stunts the growth of the online market place. It brings all the attendant benefits of job creation, improved quality of life, and of course the ever-increasing size of the market place. 

Stakeholders should not look at these levies in isolation, but in a way that gives them a broader understanding of the constraints, they are imposing on the growth of e-commerce in India. In fact, analysts should go beyond just the e-commerce sector and look at the root sector: telecom. Similar taxation-related issues have plagued telecom and in turn, jeopardized many internet businesses. 

Today the telecom industry has become the fulcrum of livelihood needs with taxi drivers, food delivery personnel, plumbers, electricians and carpenters becoming more dependent on aggregator apps. However, high license and spectrum fee, liabilities associated with Adjusted Gross Revenue (AGR) and inconsistencies across input credits utilization norms continue to hound telecom companies. Some of these norms in the past have cost the competitiveness of the crisis-ridden sector which saw a huge decline in the number of players over the past few years. 

Given the ability of e-commerce and telecom to become a “force-multiplier” in the post-pandemic economy, a progressive tax regime can create a win-win scenario for everyone and help India create a $5T digital economy. We are no longer in an era where going online is an option or a competitive advantage, it’s a necessity. Digital-first businesses and the telecom infrastructure supporting them will determine our ability to navigate the post-pandemic world. Keeping e-commerce and telecom supressed under heavy tax burdens will only prove to be counter-productive and undermine the gains being accrued from these sectors. Therefore, the burning issue is Predictable, Equitable Taxation to Propel Digital Economy for holistic growth.

Note: This article is authored by B.K. Sanyal and was  first published here