A Beginner's Guide to Understanding GST for Small Business and E-commerce Merchants

 |   24 May 2024

Table of Content

Understanding GST: The Basics

Let us first understand what GST is besides being known as Goods & Service Tax.

GST is a tax that you pay when you buy things or pay for services. Before GST, many different taxes existed like VAT, service tax, etc. All those have been removed and replaced by one uniform taxation system known as GST.

The main idea of GST is to make tax payment simpler by combining many taxes into one single tax. That's why it's called the "Goods and Services Tax" - one tax for goods (things you buy) and services (work done for you).

When you buy something from a shop or pay someone to do some work for you, you have to pay a little extra money called GST. This GST money goes to the government.

GST is the same tax for the whole country. So whether you buy something in one state or another, you pay the same GST tax is again differentiated into two which we will go over below.

If you buy something within your state, you have to pay two taxes - one to the central government (Central GST/CGST) and one to your state government (State GST/SGST).

But if you buy something from another state, you only pay one tax called the Integrated GST (IGST).

The tax is charged every time something is sold, whether within the state or between states.

Now, one can wonder when would the tax be levied on a particular product. The answer is simple, during every step of the production process.

Imagine you want to buy a toy car. But before it reaches you, the toy car goes through many hands.

  1. First, the factory buys the raw materials (plastic, metal, etc.) to make the toy car. They pay GST on the purchase of these raw materials.
  2. Then, the factory makes the toy car from the raw materials. They pay GST on this production.
  3. After making the toy cars, they store them in a warehouse. They pay GST on warehousing.
  4. From the warehouse, the toy cars are sold to a big wholesaler. GST is paid on this sale.
  5. The wholesaler sells the toy cars to smaller shops/retailers. Again, GST is paid.
  6. Finally, when you go to the shop and buy the toy car, you pay GST on this last sale.

So, at every step from the factory to the shop, GST is paid whenever the toy car changes hands or there is some added value like production, warehousing, etc. It ensures that the government collects tax at every stage, instead of just the final sale to you.

Now, that we have a basic understanding of what GST is, let’s dive into GST as an ecommerce seller or ecommerce merchant. 

Who is an E-commerce Seller? 

Let me explain this in simple terms using an example:

Imagine there is an online shopping website like Amazon or Flipkart. This website is called an e-commerce portal or operator.

Many different sellers sell their products on their e-commerce websites. These sellers could be making their websites through platforms like Zbiz or Shopify.  These sellers are called e-commerce sellers.

Some examples:

  1. A toy company selling its toys on Amazon
  2. A clothing brand selling their t-shirts and jeans on Flipkart
  3. A home appliances store selling mixers, fans, etc with their own website

These e-commerce sellers may sell on one e-commerce portal like Amazon, or they may sell on multiple portals like Amazon, Flipkart, etc.

Additionally, these same sellers may also have their own physical shops or offices from where they sell their goods, in addition to selling online on the e-commerce portals.

So in simple terms, e-commerce sellers are any persons or companies that sell their goods or services through online shopping websites/apps like Amazon, Flipkart, etc, along with potentially having their offline shops as well.

GST Registration Requirement for e-Commerce Sellers

The applicability of GST to e-commerce sellers varies depending on whether they supply goods or services. Let me break this down in simple terms.

For E-commerce Sellers Selling Goods:

  • If you sell goods/products through an e-commerce website like Amazon, Flipkart, etc., GST is applicable to you no matter how much your sales are.
  • There is no minimum turnover threshold exemption.

For E-commerce Sellers Providing Services:

  • If you provide services through an e-commerce platform and your annual turnover is less than Rs 20 lakhs, then you don't need to pay GST.
  • If your annual turnover from services exceeds Rs 20 lakhs, then GST is applicable to you.

However, there are some exceptions for service providers:

  • Providers like Uber, and Ola (passenger transportation), hotel booking sites like Yatra, housekeeping services like Urban Company, and restaurants (except high-end ones) are exempt from GST even if their turnover exceeds 20 lakhs.

For those e-commerce sellers to whom GST applies:

  • They need to register under GST as a regular taxpayer. They cannot opt for the composition scheme which allows easier GST compliance.
  • Registration is mandatory, there is no choice.

In simple terms:

  • Selling goods online - GST applies always 
  • Selling services online - GST applies if annual turnover exceeds 20 lakhs (except for some exempted service categories)
  • Mandatory GST registration for e-commerce sellers even at low turnover levels
  • No composition scheme option for e-commerce sellers

After understanding what GST is and what applies and what doesn’t, there’s a simple question that can pop up in your mind. What do I file now? 

Let me break it down in simple terms using examples:

GST Returns for E-Commerce Sellers:

  1. GSTR-1 - This is a monthly statement of all your sales that you need to file. If your annual turnover is less than Rs 5 crore, you can file it quarterly instead of monthly.
  2. GSTR-3B - This is a summary of both your sales and purchases. You can file it monthly or quarterly, depending on your turnover.
  3.  GSTR-9 - This is an annual return you need to file if your annual turnover exceeds Rs 2 crore.
  4. GSTR-9C - If your turnover exceeds Rs 5 crore, you need to get your accounts audited and file this reconciliation statement.

Due Dates:

  • GSTR-1 monthly - 11th of next month 
  • GSTR-1 quarterly - 13th of the month after the quarter ends
  • GSTR-3B monthly - 20th of next month
  • GSTR-3B quarterly - 22nd/24th of month after the quarter  
  • GSTR-9 and GSTR-9C - 31st December after the financial year ends

TCS (Tax Collected at Source):

TCS stands for Tax Collected at Source.

In the context of e-commerce, TCS applies to e-commerce operators/marketplaces like Amazon, Flipkart, Snapdeal, etc.

Specifically, these e-commerce operators are required to collect TCS at 1% on the value of supplies (goods or services) made by e-commerce sellers on their platform. 

So when an e-commerce seller makes a sale on Amazon, for example, Amazon has to deduct 1% of the sale value as TCS before making the payment to the seller. This deducted 1% TCS is then paid by the e-commerce operator (Amazon) to the government.

For the e-commerce seller:

They receive 99% of their sale proceeds after 1% TCS deduction by the e-commerce operator. However, the seller can claim a credit for this 1% TCS paid on their behalf when filing GST returns. So in simple terms, TCS of 1% is a tax collected upfront by the e-commerce companies on sales made by sellers on their platform. The sellers can claim credit for this tax paid on their behalf later.

TCS applies only to the e-commerce operators and not directly to the e-commerce sellers. The sellers just have their sale proceeds deducted by 1% by the operators.

However, it is important to note that this does not apply when the e-commerce sellers have their own website. 

TDS (Tax Deducted at Source):

Just like TCS is collected by e-commerce operators, they also have to deduct TDS from the payments made to e-commerce sellers.

The key points about TDS for e-commerce sellers:

  • E-commerce operators like Amazon, Flipkart, etc. have to deduct 1% TDS from the gross sales amount they pay to sellers.
  • This 1% TDS is deducted at the time of crediting the payment to the seller's account or at the actual time of making the payment, whichever is earlier.
  • However, TDS is not deducted if the seller's gross sales in the previous year were less than Rs 5 lakh.
  • The seller has to furnish their PAN or Aadhaar to the e-commerce operator. If they don't, a higher 5% TDS will be deducted.
  • For non-resident e-commerce sellers (from other countries), no TDS is deducted.
  • The TDS deducted is paid to the government by the e-commerce operator.
  • The seller can claim credit for this TDS paid on their behalf while filing GST returns.

So in simple words, the e-commerce companies deduct 1% of the sale amount as TDS before paying sellers, unless the sales were very low last year. Sellers can claim credit for this deducted TDS later. 

Just like TCS, TDS is also a form of tax deducted upfront by e-commerce companies which sellers can claim credit for. 

However, TDS is only applicable to those businesses providing services and not products. 

Conclusion

In simple terms, we suggest that you file your periodic GST returns, and get your accounts audited if the turnover is high, and e-commerce platforms will deduct some tax upfront from your sales which you can claim credit for later.

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