As the world continues to battle Covid-19, India braced itself for an unusual festive season this year. While vibrant card parties were replaced with online ones, the quintessential festive sales still gained a lot of traction. Another trend that seemed to continue through the festive season, was the failure to acknowledge the benefit of digitalization, particularly for small businesses. In a letter to the Finance Minister, the Confederation of All India Traders (‘CAIT’) reportedly argued that discounts offered on online marketplaces cause the exchequer substantial loss of GST revenue.
This act of singling out online businesses is not an isolated incident. During the pandemic, businesses operating in the digital ecosystem have often been put under the microscope and critiqued. Sometimes the criticism has sound reasoning. On other occasions, it is motivated by India’s general resistance to digitalisation and the popular narrative that online businesses are unaffected, or even profiting from the ongoing crisis. This article examines which category CAIT’s claim about loss of GST revenue qualifies under.
As far as the GST treatment of discounts is concerned, it is correct that the amount of GST payable on the supply of goods or services will proportionally reduce with a reduction in its price. However, to make a complete assessment of the GST impact of sales, the situation must be viewed holistically and contextually.
The outbreak of Covid-19 has had a debilitating impact on the Indian economy. The World Bank scaled down its projections for the economy, forecasting 3.2% contraction in the fiscal year 2020-21. GST revenue also saw a significant decline as compared to the corresponding figures from last year. In July and August 2020 for instance, GST revenue was 14% and 12% lower than last year, respectively. Many factors could be argued to have played a role in this fall. First, the restrictions on physical movement not only disrupted the supply chain, but also limited interactions between consumers and sellers. Second, with millions of Indians left without jobs, public purchasing power saw a sharp decline. Third, tax reliefs introduced to mitigate the economic impact of the pandemic also substantially reduced the amount of tax revenue collected. During the festive season however, transactions appeared to be picking pace again. The GST revenue for September 2020 for instance, was recorded to be 4% higher than the GST revenues in the same month last year. This was reported to be the highest GST collection in eight months. A similar trend was noticed in October, with this year’s revenue exceeding last year’s revenue by 10%. There has also been a clear increase in the volume of sales during this period.
While this growth can be attributed to several factors, it is necessary to note that low prices have been proven to drive sales. An increase in the GST collection could thus be a natural result of an increase in the volume of sales, despite a slight reduction in the sale price per unit. The CAIT letter is thus incorrect in suggesting that the mere existence of a discounted price for goods would lead to a significant reduction in India’s GST collection. Second, the GST treatment of discounts remains the same, regardless of whether the supply in question is made online or offline. Therefore, there is no justification for why the CAIT letter particularly targets online sales as far as their alleged impact on GST collections is concerned, especially since the prices are decided by the sellers themselves and not the platform. Lastly, the CAIT letter fails to acknowledge that many sellers have had a large inventory pile up due to the unprecedented halt in economic activity earlier this year. The festive sales have also allowed them to sell their stock. Due to these oversights, the CAIT letter – as far as its comments on the impact of online festive sales on GST collection is concerned – fails to support its allegations. It does small businesses a great disservice by creating resistance against digitalization and further nurturing traders’ traditional mindset.
Embracing digitalization has empowered businesses to operate despite the limitations on physical movement as imposed by the pandemic. The ability to supply goods and services without any physical contact has become an absolute necessity to operate in today’s environment. Small businesses must thus be encouraged to adopt technology.
Views expressed above are the author’s own.
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