Amazon and Alibaba Drafted Into Indian Tax Collection
(Bloomberg) -- Jeff Bezos should hate the new job Amazon just got hired for: collecting taxes in India. And before Jack Ma can rub his hands in glee, his Indian e-commerce investment, Snapdeal, has been drafted too.
Blame it on GST. India's decade-long effort to introduce a nationwide goods and services tax to replace a bewildering array of levies imposed by 29 state governments was successfully concluded late Wednesday in New Delhi. The GST will now be part of the Indian constitution, though its implementation could take anywhere between a year and 18 months.
Make no mistake: Amazon, and its main e-commerce rivals Flipkart and Snapdeal, will win big under a unified tax that will create almost overnight a single market of about 1.3 billion people -- and this at a time when voters in developed nations have grown disillusioned with multi-country trade blocs such as the European Union and the Trans-Pacific Partnership.
The biggest gain for e-tailers will be that unless the yet-to-be-determined GST rate exceeds 20 percent, many products and services will be cheaper, which could boost demand. And the frustratingly slow movement of goods from one state to another may speed up, leading to cost savings.
But there's a big catch. Currently, e-tailers only pay a federal service tax. With GST, they will practically become government-appointed tax collectors. They'll have to deduct taxes from every payment they make to thousands of small suppliers and deposit the money with the government. The vendors will then have to claim tax credits from the government on things they've bought. Their working capital needs will soar, crimping wafer-thin margins. And since a small manufacturer's record keeping is unlikely to be top-notch, there might be disputes between the online retailers and the widget makers.
As long as Bezos remains determined to defeat homegrown Flipkart in India, with Ma's Alibaba waiting for the right moment to make a bigger splash, they won't mind paying the higher compliance and legal costs. After the price discounts have ended, consumers might feel the pinch.
This isn't how GST was supposed to work. If Amazon sells furniture online, it should tax the buyer and write a check to the government for the amount collected. It should also send a monthly bill to the government for any GST included in the invoices it paid to furniture makers. It's up to those manufacturers to pay their share of the tax and, in turn, claim credit on the levy charged by their wood suppliers.
In the proposed Indian version, however, it appears that even very small businesses will get whacked. Flipkart, Snapdeal and Amazon would -- without exception -- deduct GST from the payments they make. But unless the suppliers are all registered with the GST administration, they won't be able to claim tax credits. By hiring the online retailer as tax collector, the Indian government will earn assured revenue from the entire supply chain. For family operations, though, the paperwork may be too much to handle. So they might decide to let the government keep the money. Or they might just sell offline.
Neither is a great outcome for the growth of Indian e-commerce. Much as they might like the idea of GST, Amazon and Alibaba won't cherish the prospect of becoming New Delhi's collection agents.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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