GST and India's Gig Economy: Tackling Legal Complexities and Ensuring Tax Equity in a VUCA Landscape

The author is Kumkum Suneja, a fourth-year student at the National Law Institute University, Bhopal. She authored this article while being an intern in CTL for the month of December 2024.

Abstract:

The gig economy in India, powered by digital platforms and online marketplaces, has transformed traditional business models while introducing a host of challenges under the Goods and Services Tax (GST) regime. With the gig workforce expected to grow to 23.5 million by 2030, major players like Uber, Zomato, and Amazon face complex legal and compliance requirements, especially in a fast-changing and unpredictable environment.

This piece delves into the intersection of GST and the gig economy, focusing on the provisions of Sections 52 (Tax Collected at Source) and 9(5) (Reverse Charge Mechanism) of the Central Goods and Services Tax Act, 2017. It also examines the key hurdles these platforms encounter, including ambiguities in classifying e-commerce operations, complications in determining taxable values due to discounts and incentives, and the administrative challenges posed by managing large transaction volumes, returns, and cross-border supplies.

Recent changes, such as those introduced in the Finance Act, 2023, have imposed stricter penalties for non-compliance, which disproportionately impact smaller gig platforms. The article critiques the lack of clarity in GST rulings and suggests practical reforms, including pre-filled GST returns, centralized reporting systems, and standardized guidelines for handling cancellations and returns.

Drawing inspiration from global practices, such as the EU’s One Stop Shop (OSS) mechanism and the US’s economic nexus model, the article advocates for aligning India’s GST framework with international standards. It emphasizes the need for centralized compliance systems and tailored reforms to ensure tax fairness, reduce the compliance burden, and foster innovation.

A GST system that balances simplicity, fairness, and adaptability is crucial to supporting sustainable growth in India’s burgeoning digital economy. By addressing these challenges and modernizing its approach, India can ensure that its gig economy remains competitive and future-ready.

Introduction

The gig economy, also known as the sharing or access economy, represents a workforce model built on temporary and flexible jobs, predominantly filled by independent contractors and freelancers rather than traditional full-time employees. Globally, this sector is driving a significant shift in employment paradigms, redefining the nature of work. In India, with its vast labor pool exceeding half a billion and a rapidly urbanizing, tech-savvy population, the gig economy is advancing at an extraordinary rate. Projections suggest that by 2029-30, the country’s gig workforce will swell to 23.5 million, making up 4.1% of the total workforce engaged in flexi-staffing or gig/platform-based work.[1] This surge is fueled by growing demand for remote work, the expansion of digital services, and the critical need to address the gap between the demand for and supply of skilled tech talent.[2]

Gig workers in India fall broadly into two categories: platform-based workers, who secure employment through digital platforms, and non-platform workers, who operate in more traditional roles as casual or part-time laborers.[3] Companies like Uber, Zomato, and Amazon have become key intermediaries, utilizing technology to match labor supply with demand, streamline service delivery, and reduce information gaps. However, the rapid growth of digital marketplaces operates within a VUCA (volatility, uncertainty, complexity, and ambiguity) environment. Here, technological innovations and evolving business models often outpace the development of appropriate regulatory frameworks.[4]

India’s Goods and Services Tax (GST) regime, a cornerstone of the country’s indirect tax system, seeks to address these complexities by offering a unified structure for taxing goods and services. It aims to ensure compliance and promote economic fairness. Nevertheless, the dynamic nature of digital marketplaces introduces significant hurdles, including ambiguous taxation norms, legal classification challenges, and achieving equitable tax treatment for all stakeholders.

This article examines the intricate relationship between GST and digital marketplaces, highlighting the unique legal and compliance issues faced by gig economy platforms. Drawing lessons from global taxation models, such as the European Union’s One Stop Shop (OSS) system and various U.S. state-level frameworks, it suggests practical reforms to create a simpler, fairer, and future-ready taxation structure. These measures aim to align India’s GST framework with the needs of its rapidly evolving digital economy while fostering sustainable growth and innovation.

Digital Marketplaces and GST: Unpacking Gig Economy’s Tax Terrain

Digital marketplaces have revolutionized traditional business models by leveraging the internet to facilitate transactions across geographical boundaries. Platforms like Uber and Ola in ride-sharing, Swiggy and Zomato in food delivery, and Upwork and Freelancer in freelance work act as intermediaries, employing advanced algorithms to match supply with demand, enhancing efficiency and user experience.[5]

India’s GST framework includes specific provisions to streamline tax collection from e-commerce platforms. As per Sec. 2(44) of the Central Goods and Services Tax (CGST) Act, 2017, Electronic Commerce means supply of goods or services or both, including digital products over digital or electronic network.[6] As per Sec. 2(45) of the CGST Act, 2017, Electronic Commerce Operator means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce.[7] 

Under the GST framework, platforms classified as Electronic Commerce Operators (ECOs), such as Amazon, Flipkart, Swiggy, and Zomato, who facilitate third-party suppliers to supply goods through their online marketplace, have clearly defined tax obligations under Sections 52 and 9(5) of the CGST Act, 2017.[8] These obligations vary based on the nature of services facilitated and the role of the ECO in taxable transactions.

Section 52 of the CGST Act: Tax Collected at Source (TCS)

Section 52 of the CGST Act, 2017 mandates that ECOs collect Tax Collected at Source (TCS) on the net taxable value of supplies facilitated through their platforms.[9] Previously, ECOs were required to collect TCS at a rate not exceeding 1% (0.5% CGST and 0.5% State Goods and Services Tax/Union Territory Goods and Services Tax, or 1% under the Integrated Goods and Services Tax (IGST) Act for inter-state supplies).

However, as per Notification No. 01/2024-Integrated Tax, dated 10th July 2024, the TCS collection rate has been reduced to 0.5% (0.25% CGST and 0.25% SGST/UTGST, or 0.5% IGST) on the net value of taxable inter-state supplies. This change, effective from 10th July 2024, was recommended during the 53rd GST Council meeting and aims to ease the compliance burden on ECOs while ensuring efficient tax collection.[10]

For instance, if a registered supplier, M/s A Ltd., supplies goods worth ₹45,00,000 through an ECO in a given month and ₹5,00,000 worth of goods are returned, the net value of taxable supplies is ₹40,00,000. Under the revised TCS rate, the ECO would collect TCS at 0.5%, amounting to ₹20,000, and deposit this with the government. The remaining payment of ₹39,80,000 would then be transferred to the supplier. This adjustment aligns with the government’s objective of streamlining tax administration for the growing digital economy.

ECOs must continue to file Form GSTR-8 monthly, providing details of the TCS collected and the net taxable supplies. This ensures transparency and aids suppliers in reconciling their tax liabilities reflected in Form GSTR-2A. The notification also reiterates that ECOs without a physical presence in certain states or union territories can apply for TCS registration using their registered head office address.[11]

Section 9(5) of the CGST Act: Reverse Charge Mechanism

Section 9(5) shifts the responsibility of paying GST from the supplier to the ECO for specific notified services. This includes passenger transport providers through e-commerce operators like Ola, Uber, etc, restaurant services (including cloud kitchens), providers of housekeeping services through aggregator platforms such as Urban Company, etc. and accommodation services like Yatra.com.[12] ECOs are treated as deemed suppliers for these services, irrespective of whether the actual service provider is registered under GST. This mechanism ensures smoother tax collection, especially when dealing with smaller or unregistered service providers.[13]

For example, since January 1, 2022, food delivery platforms like Swiggy and Zomato are responsible for paying a flat 5% GST on restaurant services directly, regardless of the registration status of the restaurant.[14] While this does not significantly affect the end consumer’s bill, it streamlines tax administration by consolidating GST responsibilities with ECOs. Notably, under this mechanism, GST must be paid via the electronic cash ledger, as Input Tax Credit (ITC) cannot be utilized.[15]

ECOs handling supplies under Section 9(5) must file GSTR-3B, specifically reporting these supplies in Table 3.1.1, effective August 1, 2022. They must also issue invoices for the notified services they facilitate, ensuring compliance and transparency.[16] If an ECO has no physical presence or representative in a taxable territory, it must appoint a person to handle its tax liabilities.[17]

Comparison of Sections 52 and 9(5)

While both sections impose tax responsibilities on ECOs, their scope and application differ significantly:

1. Tax Liability: Section 52 involves TCS collection, where the ECO collects tax from the supplier’s transactions. Section 9(5), however, makes the ECO directly liable to pay GST on specified services, treating the ECO as the supplier.

2. Registration: Under Section 52, both the ECO and the supplier must register for GST, while Section 9(5) allows the supplier to voluntarily register and enjoy threshold exemptions. The ECO’s registration is mandatory in both cases.

3. Compliance: For Section 52, ECOs must file GSTR-8 monthly, while for Section 9(5), they must report supplies in GSTR-3B.

4. Reverse Charge Mechanism: This is applicable only under Section 9(5), shifting the GST liability from the supplier to the ECO.

Recent Updates and Implications

The Union Budget 2024 introduced a retrospective amendment to Section 122(1B), clarifying that penalties for TCS defaults under Section 52 apply only to ECOs liable under that section.[18] ECOs under Section 9(5) are subject to general penalties for non-compliance.[19] This amendment reflects the government’s commitment to refining GST provisions for digital platforms.

Additionally, the government has clarified that ECOs must raise separate invoices for transactions involving a combination of notified and non-notified services. If the ECO lacks a physical presence, the appointed representative or designated individual becomes liable for GST compliance.[20]

Thus, the combined provisions of Sections 52 and 9(5) aim to ensure comprehensive tax collection in India’s rapidly expanding digital economy. While Section 52 focuses on collecting TCS for taxable supplies, Section 9(5) addresses services facilitated by ECOs, simplifying compliance for smaller or unregistered suppliers. Together, these provisions ensure a robust and streamlined GST framework, balancing administrative efficiency with accountability. However, the evolving landscape of digital commerce necessitates ongoing refinement of these laws to address emerging challenges and support India’s vision of a thriving digital economy.

Challenges in the E-Commerce GST Model

India's e-commerce sector has experienced unprecedented growth, revolutionizing traditional retail and giving rise to a dynamic digital marketplace. This expansion aligns with government initiatives such as ‘Digital India’ and ‘Startup India,’ promoting innovation and digital transformation.[21] However, it has also introduced considerable challenges in implementing and managing GST regulations for e-commerce operators (ECOs).

These challenges arise from the inherently intricate nature of e-commerce business models, the significant compliance responsibilities placed on operators, and the lack of clarity in legal interpretations under the GST framework.

1. Defining E-Commerce Operators

The GST framework presents significant challenges in determining which activities qualify as e-commerce operations and which platforms are liable under its provisions. The CGST Act, 2017 broadly defines an e-commerce operator (ECO) as any entity facilitating the supply of goods or services through an electronic platform.[22] While platforms like Amazon and Flipkart, which actively manage logistics and payments, are clearly categorized as “active ECOs” and are liable for Tax Collected at Source (TCS) under Section 52 of the CGST Act,[23] the inclusion of platforms like OLX or Justdial, which merely list products or services without directly processing payments or facilitating transactions, creates a grey area.

This ambiguity becomes particularly pronounced for newer models such as commission-free monetization, where platforms connect service providers with consumers but do not charge per-transaction commissions, instead relying on subscription or membership fees for revenue. For instance, a ride-hailing platform charging a flat fee for driver access to its platform must remit GST on that fee, but uncertainty arises regarding its liability for GST on transactions between drivers and passengers. Similarly, freelance platforms charging membership fees face questions about whether GST obligations extend to individual projects facilitated through their services. These unresolved issues highlight the lack of clarity in defining an ECO’s role and GST liability, particularly for platforms with minimal transactional involvement or unconventional revenue models. 

Divergent Interpretations in GST Rulings

Several rulings have clarified, and at times complicated, the understanding of e-commerce operator (ECO) liability under GST, particularly for platforms with varying business models and involvement. In the Rapido case (Roppen Transportation Services Ltd.),[24] the Karnataka Authority for Advance Rulings (AAR) held that the platform was liable to pay GST under Section 9(5) as a “deemed supplier.” The ruling emphasized that Rapido's role in facilitating passenger transport services, including enabling bookings through its platform, constituted significant involvement, even though it did not directly set fares or collect payments. The AAR reasoned that by connecting drivers and passengers and ensuring service completion, the platform was central to the transaction, thereby triggering GST liability.

In contrast, in the Multiverse Technologies[25] and Juspay Technologies[26] cases, the Karnataka AAR ruled that platforms merely connecting consumers and service providers without controlling key aspects of the transaction, such as pricing or delivery of services, were not liable under Section 9(5). For instance, Juspay provided IT solutions to facilitate payments without participating in the transaction itself, while Multiverse acted as a technical connector. The rulings stressed that platforms functioning purely as facilitators with no substantial involvement in transactional execution do not fall within the ECO framework.

The Humble Mobile Solutions[27] case reinforced this principle, where the AAR clarified that providing IT infrastructure or support without direct engagement in service provision does not make a platform an ECO under GST.

In recent rulings, stricter interpretations of GST liability for e-commerce operators (ECOs) have emerged, particularly in cases like Opta Cabs[28] and Balat Enterprises.[29] The Karnataka Appellate Authority for Advance Rulings (AAAR) in the Opta Cabs case determined that the platform's activities, such as generating invoices and facilitating bookings, constituted significant transactional involvement beyond mere facilitation. This interpretation classified the platform as an active participant, triggering GST liability under Section 9(5) of the CGST Act.

Similarly, the Tamil Nadu Authority for Advance Rulings (AAR) in the Balat Enterprises case held that providing detailed service information and maintaining feedback mechanisms demonstrated active involvement in the transaction. This ruling reinforced the principle that any additional engagement beyond basic facilitation renders a platform liable as a deemed supplier under GST provisions.

The Changejar Technologies[30] case added a novel perspective to the classification of ECOs. The Karnataka AAR ruled that a platform facilitating the sale of digital gold via an escrow mechanism qualified as an ECO under the GST framework. The platform’s role in ensuring secure transactions and charging a commission demonstrated a degree of involvement sufficient to mandate compliance. The AAR held that such activities necessitated adherence to Tax Collected at Source (TCS) provisions under Section 52, along with registration obligations under the CGST Act.

These rulings underscore that any involvement exceeding basic facilitation can trigger GST liabilities, shaping the compliance landscape for digital platforms operating under India’s GST regime.

Implications for Platforms

These rulings highlight the importance of understanding the degree of involvement required to qualify as an ECO. Platforms acting purely as intermediaries, as seen in the Multiverse and Juspay cases, may avoid liability under Section 9(5) due to their limited role in the transaction. Conversely, platforms engaging in activities such as booking facilitation, invoice generation, or managing escrow arrangements, as in the Rapido, Opta Cabs, and Changejar cases, face significant compliance obligations.

Once Section 9(5) applies, platforms must remit GST, file returns like GSTR-1 and GSTR-3B, and adhere to cash payment requirements outlined in CBIC’s circular dated December 17, 2021. The complexity of these rulings underscores the need for clearer guidelines to address evolving digital business models and ensure uniform interpretation of GST laws.

The Need for Clarity and Consistency

The lack of uniformity in GST rulings has posed significant challenges for e-commerce platforms, particularly those exploring innovative business models such as commission-free monetization or digital asset sales. This regulatory ambiguity increases compliance burdens and highlights the urgent need for a clear and comprehensive definition of e-commerce operators (ECOs) under the GST framework. A tiered classification system for ECOs, based on their level of involvement in transactions, could provide much-needed clarity and fairness. Platforms could be divided into three categories: passive facilitators, active operators, and hybrid models. Passive facilitators, such as platforms that only provide listings or connect users without processing payments or managing service delivery, should be exempt from GST liabilities under provisions like Section 9(5). Active operators, which handle key aspects like bookings, payments, or logistics, should continue to bear GST obligations. Hybrid models, including platforms generating revenue through subscriptions or membership fees rather than commissions, could have tailored GST provisions applied to platform fees while being exempt from liabilities for transactions between users.

To implement this classification effectively, detailed criteria must be developed to determine a platform’s role. Factors such as the extent of control over pricing, involvement in service delivery, and revenue generation models would help classify platforms accurately. For instance, platforms that collect payments, issue invoices, or facilitate logistics would be categorized as active operators, while those merely connecting users with service providers without managing transactions would fall under passive facilitators. This clarity would reduce ambiguity, prevent conflicting interpretations, and allow platforms to understand their obligations with greater certainty.

Uniformity in application across jurisdictions is equally critical. The government could address this by issuing a comprehensive circular that provides detailed explanations of different platform roles and their corresponding GST liabilities. This circular could include illustrative scenarios, such as commission-based platforms, subscription-driven models, or platforms facilitating digital asset sales, to clarify liabilities under various contexts. Standardized guidelines would not only reduce the scope for legal disputes but also build trust between businesses and tax authorities, fostering a more transparent regulatory environment.

Additionally, regular engagement between regulators and e-commerce platforms is necessary to ensure the definitions remain relevant to emerging business models. The digital economy evolves rapidly, introducing new forms of transactions and revenue streams. Periodic reviews of the classification system would allow GST regulations to adapt to these changes, ensuring fairness and clarity while supporting innovation. A consultative approach would ensure that the tax framework remains robust, transparent, and aligned with the needs of the e-commerce sector. By addressing these definitional challenges, the government can foster a consistent tax environment that supports the growth of the digital economy without stifling innovation.

2. Calculating and Reporting GST for E-Commerce Platforms

Another significant challenge for e-commerce platforms, such as Amazon, Flipkart, Swiggy, and Zomato, lies in determining how GST should be calculated and reported, particularly when incentives like discounts, cashback, and reward points are offered to customers. These marketing strategies are integral to driving competitiveness and improving customer experience. However, they create substantial ambiguity in identifying the taxable value of supplies, leading to inconsistencies across the industry.[31] For instance, when Swiggy provides a ₹100 discount on a ₹1,000 meal, the question arises: should GST be calculated on ₹1,000 (the original price) or ₹900 (the discounted price)? The ruling in M/s Gensol Ventures Private Limited[32] provided clarity by asserting that GST should be calculated on the discounted value, but similar consistency is lacking in other scenarios, creating a patchwork of interpretations.

Complications increase when post-supply discounts are considered. The Maharashtra AAR in the M/s. Ultratech Cement Limited case[33] ruled that post-supply discounts, unless predetermined in the terms of supply and specifically linked to invoices, could not be excluded from the taxable value. Similarly, the Tamil Nadu AAAR in the MRF Limited case[34] held that post-supply discounts must meet the conditions of Section 15(3)(b) of the CGST Act to be deducted.[35] These rulings place an administrative burden on platforms to define, document, and link every incentive to individual invoices, which becomes especially difficult given the high transaction volumes e-commerce businesses handle daily.

The challenges are further exacerbated by the unclear treatment of cashback. For example, if a platform offers ₹100 cashback on a ₹1,000 transaction, questions arise about whether GST should be calculated on the pre-cashback or post-cashback amount. As cashback is typically provided after the transaction, the lack of clear guidelines leaves platforms in a state of uncertainty. Similarly, platform-funded discounts, where the platform, not the seller, absorbs the cost, create a gray area in GST compliance. If Flipkart funds a ₹500 discount on a ₹5,000 product, it is unclear whether GST should apply to the original price or the reduced price.

Reward programs and loyalty points add another layer of complexity. Platforms must determine whether the taxable value should be based on the full price, the discounted price after point redemption, or the amount the customer actually pays. In the M/s. Loyalty Solutions and Research Pvt. Ltd. case,[36] the Karnataka AAR ruled that loyalty points redeemed by customers are taxable but did not establish a uniform method for determining the taxable value, leading to inconsistencies across platforms.

The absence of uniformity in GST interpretation places a significant burden on e-commerce operators, forcing them to allocate substantial resources toward compliance. This not only hampers operational efficiency but also diverts attention away from innovation and customer service. The need for clear, actionable, and consistent guidelines has become urgent to ensure the sustainable growth of the e-commerce sector.

Reforms to Address GST Challenges

To tackle the complexities of calculating and reporting GST for e-commerce platforms, the government needs to implement comprehensive, practical, and transparent reforms. A critical first step is standardizing the rules for determining the taxable value of supplies in scenarios involving discounts, cashback, and reward points. The government should explicitly clarify that GST applies to the net value of a transaction after accounting for discounts or redeemed points. For cashback and platform-funded discounts, clear provisions are needed to establish whether these should be treated as reductions in the taxable value or as promotional expenses borne by the platform. This clarity would eliminate the current ambiguity that leaves platforms vulnerable to disputes arising from inconsistent interpretations.

Streamlining the process for post-supply adjustments is another essential reform. Provisions under Section 34 for credit notes and tax liability adjustments should be integrated with Section 52 obligations concerning Tax Collected at Source (TCS). Platforms should have the ability to automate the reconciliation of these adjustments within their GST filings, ensuring efficient and seamless compliance. This can be facilitated through technological solutions, such as linking GST and TCS filings via centralized government portals. Automating these processes would reduce manual intervention, minimize errors, and enhance the overall efficiency of high-volume operators.

A centralized GST authority is crucial to resolving inconsistencies in tax rulings. This body would be tasked with issuing binding interpretations for ambiguous scenarios, thereby harmonizing conflicting state-level AAR rulings and offering authoritative guidance on critical issues such as post-supply discounts, cashback, and loyalty programs. For instance, a standardized ruling could specify that cashback and loyalty points are treated as reductions in the taxable value, provided they are explicitly documented at the time of supply. Such authoritative interpretations would ensure uniform compliance requirements for platforms, regardless of their location or business model.

The government should also consider introducing targeted incentives to encourage e-commerce platforms to invest in compliance technology. Offering tax credits or deductions for the implementation of automated reconciliation systems and AI-based invoicing tools would alleviate the compliance burden on businesses. These measures would not only support platforms in fulfilling their obligations but also enhance overall tax compliance and improve reporting accuracy across the sector.

Finally, regular engagement between the government and industry stakeholders is essential to address emerging challenges and adapt GST rules to the rapidly evolving nature of e-commerce. Through ongoing consultations with platform representatives, tax authorities could identify specific pain points and develop rules that balance compliance efficiency with operational feasibility. A collaborative approach to GST policy-making would ensure that the regulatory framework remains fair, adaptable, and supportive of innovation in the e-commerce ecosystem.

3. Compliance for E-Commerce Operators

The GST compliance landscape poses significant challenges for e-commerce operators (ECOs), as the complex framework creates substantial administrative and financial burdens. While intended to promote transparency and accountability, the current system's intricacies often lead to errors, disputes, and increased compliance costs, particularly for platforms managing high transaction volumes or employing innovative business models. Key areas of concern include reporting and reconciliation, ambiguities in invoicing bundled services, difficulties in adjusting TCS for returns and cancellations, and the complexities of cross-border compliance. These challenges are interrelated and exacerbate operational inefficiencies for both large and small platforms.

a) Challenges in Reporting and Reconciliation

ECOs face significant compliance challenges under India’s GST framework, particularly due to the requirement to file multiple returns such as GSTR-8 for Tax Collected at Source (TCS) under Section 52[37] and GSTR-3B for supplies under Section 9(5).[38] These filings demand meticulous reconciliation with suppliers’ returns to prevent discrepancies. Even minor clerical errors can lead to audits, penalties, and heightened scrutiny from tax authorities. For instance, if a supplier erroneously reports a taxable value in their GSTR-1 that does not align with the ECO’s GSTR-8, the platform may encounter compliance hurdles despite the error being beyond their control.

The challenge is magnified for platforms managing thousands of transactions daily. A food delivery platform like Swiggy, which processes orders from numerous restaurants and customers, must track and validate every adjustment, including cancellations and credit notes. This increases the complexity of reconciliation and raises the risk of delays and errors. Smaller platforms, often constrained by limited resources and reliant on manual processes, are even more susceptible to compliance risks. Without access to automated systems, they struggle to compete with larger players, further compounding their operational challenges. Addressing these issues is critical for creating a fair and efficient GST compliance environment that supports businesses of all sizes.

b) Ambiguities in Invoicing for Bundled Services

Platforms offering bundled services face significant confusion in determining the correct GST treatment. For example, a food delivery platform like Zomato that combines taxable restaurant services (5%) with potentially exempt delivery charges must decide how to split the taxable value. Should the bundled service be classified as a composite supply, where the principal supply dictates the tax rate, or as a mixed supply, which is taxed at the highest rate? Contradictory rulings have exacerbated this uncertainty.In M/s. Arihant Enterprises,[39] the Maharashtra AAR ruled that bundled sales of ice cream constituted a mixed supply, taxed at the highest rate. Conversely, in M/s. Resonance Eduventures Limited,[40] the Rajasthan AAAR treated coaching services bundled with study materials as a composite supply, taxed based on the principal component. These conflicting interpretations force ECOs to adopt individualized approaches, increasing compliance risks and litigation potential.

c) TCS Adjustments for Returns and Cancellations

Managing Tax Collected at Source (TCS) adjustments for returns and cancellations is another persistent issue. Section 34 of the CGST Act[41] allows credit notes to reduce tax liability, but reconciling these adjustments with TCS obligations under Section 52 is complex. Consider a situation where a product priced at ₹10,000 is returned after TCS of ₹100 has been remitted. The ECO must determine how to adjust this remitted amount in subsequent filings while ensuring accurate reporting across all systems. For platforms handling a high volume of returns, such as Flipkart during large-scale sales events, delays in reconciling these adjustments can lead to cascading compliance issues.

d) Cross-Border Compliance and IGST Complexities

Platforms involved in cross-border transactions face distinct challenges under the GST framework, particularly with managing Integrated GST (IGST) for inter-state supplies and state-specific SGST/CGST for intra-state transactions. For instance, a platform like Amazon facilitating international shipments must navigate a labyrinth of regulations, often requiring the appointment of representatives in states where it lacks a physical presence. This not only increases administrative burdens but also adds logistical complexities to ensure compliance across multiple jurisdictions.

Additionally, the ambiguity surrounding credit note issuance for returned goods in cross-border transactions further complicates matters. Different jurisdictions often impose inconsistent rules on credit note procedures, making it challenging for e-commerce operators to adopt uniform practices. This lack of standardization not only increases the risk of non-compliance but also creates operational inefficiencies, particularly for platforms managing high transaction volumes across multiple regions. Addressing these challenges is essential for ensuring that India’s GST framework aligns with the realities of cross-border digital trade while fostering a more predictable and business-friendly environment.

e) Stricter Penalties for Non-Compliance Under the Finance Act, 2023

The Finance Act, 2023 introduced stricter penalties for non-compliance, particularly targeting e-commerce platforms operating under Section 52. These penalties are intended to enhance accountability and ensure timely and accurate compliance.[42] While this measure is effective in promoting adherence to GST rules, it disproportionately affects smaller platforms and startups.

Unlike larger e-commerce players with the resources to invest in advanced compliance systems, smaller platforms often rely on manual processes, making them more prone to errors. The financial burden of hiring tax consultants, investing in technology, or allocating dedicated resources for compliance can be overwhelming for these businesses. In some cases, the cost of compliance may outweigh the benefits of operating as an ECO, discouraging smaller players from entering the market.

Additionally, startups and small platforms often lack the expertise to navigate the intricate GST framework, leaving them vulnerable to penalties for minor errors or delays in filing. These businesses must dedicate significant time and resources to understanding complex provisions like TCS adjustments, invoice generation, and cross-border compliance, diverting their focus from innovation and growth.

Recommendations for Reform

To effectively address the challenges faced by e-commerce operators (ECOs) under the GST framework, a holistic and practical approach is essential. By implementing comprehensive and actionable reforms, the GST system can be simplified to create a more predictable and supportive compliance environment.

One critical reform would involve developing a centralized compliance portal that integrates filings such as GSTR-8, GSTR-3B, and other related submissions. This system could offer pre-filled returns derived from transaction data, automatically accounting for credit notes, returns, and cancellations. By linking TCS adjustments directly to credit notes, the need for manual reconciliations would be eliminated. For instance, a real-time dashboard could enable platforms to track their compliance status, reducing the likelihood of errors and streamlining the submission process.

Another priority is issuing binding and uniform guidelines for classifying bundled services. These guidelines should establish a clear methodology for distinguishing between composite supplies, taxed based on the principal supply, and mixed supplies, taxed at the highest applicable rate. For example, food delivery platforms that combine restaurant services with delivery charges could benefit from a predefined formula to apportion the taxable value. Such clarity would eliminate ambiguities and promote consistency in invoicing across platforms.

To simplify TCS adjustments, the government could introduce a mechanism allowing platforms to deduct TCS for returned goods directly in subsequent filings, bypassing the need for additional reconciliations. A TCS adjustment window within the centralized compliance portal could allow platforms to update returns seamlessly. This feature should also incorporate automated verification systems to minimize discrepancies.

Cross-border transactions present unique challenges that could be addressed by introducing a unified compliance framework, such as a One-Stop Compliance Portal. Platforms operating across multiple states could appoint a single compliance representative, reducing administrative redundancies and costs. The portal could consolidate IGST, SGST, and CGST filings, while also enabling platforms to manage credit notes and tax adjustments for returns efficiently. For example, centralized registration for platforms like Amazon, which operate across multiple states, would eliminate the need for appointing representatives in each jurisdiction. A standardized system for issuing GST documents related to cross-border returns would further resolve jurisdictional inconsistencies.

Smaller platforms and startups also require targeted support to ensure they meet compliance obligations without facing disproportionate burdens. Subsidized access to compliance tools or simplified filing schemes could provide meaningful relief for platforms below a certain turnover threshold. For instance, a flat-rate GST compliance model could be developed specifically for startups, enabling them to comply without significant investment in technological infrastructure.

By implementing these reforms, the GST regime can evolve into a streamlined and inclusive system that supports the growth of e-commerce operators while maintaining robust tax compliance. These measures would not only reduce operational inefficiencies but also foster innovation and growth in India’s digital economy.

Global Best Practices in Digital Taxation

India’s gig economy, powered by platforms like Swiggy and Uber, faces significant hurdles under the current GST framework, including multi-state filings and complex cross-border compliance requirements. These challenges not only increase operational costs but also discourage smaller businesses from entering the market. Global models, such as the EU’s One-Stop Shop (OSS) and the US’s economic nexus laws, provide valuable insights for simplifying GST and fostering a more inclusive and efficient digital economy in India.

A) EU's One-Stop Shop (OSS) Mechanism: Insights for India

The EU's One Stop Shop (OSS) mechanism, introduced as part of its 2021 VAT reforms, has significantly simplified tax compliance for businesses operating across multiple jurisdictions. Under this system, businesses can report, file, and remit taxes through a single digital platform, eliminating the need to register and file returns in every country of operation.[43] Instead, companies submit a consolidated return specifying the VAT collected in each jurisdiction. For example, a French company selling goods to consumers in Germany, Spain, and Italy can file a single VAT return via OSS, substantially reducing administrative costs and improving operational efficiency.

In contrast, India's current GST framework requires gig and e-commerce platforms to register and file returns separately in each state where they operate. This system places a considerable burden on platforms such as Ola and Urban Company, which operate across multiple states and engage with a wide network of service providers. Adopting an OSS-inspired mechanism in India could revolutionize compliance processes by enabling platforms to file a single return that details state-wise transactions, with GST revenue automatically allocated to the respective states. For instance, Uber, which currently contends with state-specific refund and adjustment rules, could consolidate all ride-related data across India into one comprehensive return. This streamlined approach would not only simplify compliance but also ensure accurate and efficient tax reporting, reducing administrative burdens for platforms and tax authorities alike.

In India, the current GST framework requires gig and e-commerce platforms to register and file returns in every state where they operate. This approach is especially burdensome for platforms like Ola and Urban Company, which operate across multiple states and involve numerous service providers. An OSS-inspired mechanism could simplify compliance by enabling platforms to file a single return detailing state-wise transactions, with GST revenue automatically allocated to the respective states. For instance, Uber, which currently navigates state-specific refund and adjustment rules, could report all rides across India in one comprehensive return, streamlining its compliance process while ensuring accurate tax reporting.

The benefits of implementing a One Stop Shop (OSS) mechanism extend significantly to cross-border transactions. Platforms like Amazon Global and AliExpress, which facilitate imports into India, often face difficulties in remitting Integrated GST (IGST) and adhering to state-specific tax regulations. A centralized compliance portal could address these challenges by consolidating reporting requirements and ensuring greater transparency in tax remittance. For instance, an international e-commerce platform facilitating ₹50 crore in sales to Indian consumers could utilize an OSS-inspired system to automatically calculate IGST, allocate state-wise revenue shares, and manage refunds for returned goods—all through a single interface. This would simplify the compliance process and enhance efficiency for both businesses and tax authorities.

Smaller platforms and startups, which are disproportionately burdened by compliance costs, would also gain considerably from centralized filing. Under the current system, their limited resources often make navigating India’s complex GST framework challenging, creating significant barriers to entry in the digital economy. By eliminating the need for state-specific registrations and filings, an OSS model could encourage broader participation, foster innovation, and promote competition. For example, a startup offering gig services in five states could submit a single consolidated GST return instead of managing separate filings for each state. This streamlined approach would allow such businesses to focus on scaling their operations rather than dealing with intricate compliance processes.

Implementing an OSS system in India would require extensive reforms and robust technological infrastructure. A digital portal capable of handling high transaction volumes while integrating state-specific provisions would be essential. Advanced technologies like artificial intelligence (AI) and blockchain could be employed to enhance transparency, automate reconciliations, and minimize errors. Blockchain-based ledgers, for example, could provide real-time transaction tracking, ensuring accurate allocation of GST revenue to states and reducing discrepancies in reporting.

Additionally, aligning existing policies with an OSS framework would be critical to avoid overlaps or inconsistencies. India’s equalization levy[44] and GST provisions for Online Information and Database Access or Retrieval (OIDAR) services[45] would need harmonization to ensure seamless integration. Clear guidelines on reporting standards, refund processes, and cross-border transactions would also be required. For instance, platforms like Netflix providing OIDAR services in India could use the OSS portal to report revenue, with taxes automatically allocated to relevant states based on user consumption patterns. Such clarity would facilitate smoother transitions and compliance for global and domestic players alike.

The EU’s OSS mechanism demonstrates how centralized compliance systems can reduce administrative burdens while ensuring efficient tax collection. For India, adopting a similar model would address critical challenges faced by gig platforms and e-commerce operators, particularly in managing multi-state compliance and cross-border complexities. By leveraging the OSS approach, India could streamline its GST framework, align with global best practices, and strengthen its digital economy. These reforms would pave the way for sustained growth, innovation, and increased participation in the gig economy.

B) US State-Level Taxation: Lessons for India’s GST Framework

The United States’ state-level taxation approach offers valuable lessons for refining India’s GST framework, especially in addressing challenges faced by gig economy platforms and e-commerce operators. In South Dakota v. Wayfair, Inc.(2018),[46] the US Supreme Court empowered states to impose sales tax based on economic nexus rather than physical presence. This principle ensures platforms significantly contributing to a state’s economy are taxed fairly, even without a physical footprint. For India, where the gig economy thrives on digital platforms like Swiggy, Zomato, and Urban Company, this model holds practical relevance.

Economic nexus laws in the United States establish specific revenue or transaction thresholds to determine tax liability, requiring platforms surpassing $100,000 in annual sales or conducting more than 200 transactions in a state to register and remit taxes. Translating this approach to India, a similar threshold-based framework could ensure that gig economy platforms extensively operating in Indian markets, including foreign platforms without local offices, contribute to GST revenues. For example, a global freelance marketplace facilitating services worth ₹10 crore annually to Indian clients could be required to register and discharge GST obligations, ensuring that revenue generated within India’s borders is appropriately taxed.

India’s gig economy platforms currently face significant compliance challenges under the GST framework. Urban Company, for instance, connects service providers such as beauticians and carpenters with customers through a commission-based model. Clarifying the GST liability of such platforms through rules inspired by US economic nexus laws could streamline compliance and promote fairness. For instance, if Urban Company facilitates ₹1 crore in transactions in a financial year, it could be classified as meeting the nexus threshold. This would centralize compliance responsibility on the platform rather than leaving individual service providers to navigate complex GST requirements.

Another essential component of the US system is its Marketplace Facilitator Laws, which require platforms like Etsy and eBay to collect and remit taxes on behalf of third-party sellers.[47] This approach simplifies compliance for individual sellers by shifting tax collection responsibilities to the platform itself. India’s Tax Collected at Source (TCS) mechanism under Section 52 of the CGST Act mirrors this concept but suffers from inconsistent implementation and ambiguity regarding its application to gig platforms. Platforms like Swiggy and Zomato, which handle significant transaction volumes for restaurants and delivery partners, could benefit from clearer Marketplace Facilitator rules. For instance, if Swiggy acts as the deemed supplier for restaurant services under Section 9(5), explicitly defining its role as a tax collection facilitator would ensure uniform compliance and reduce disputes.

Consider a delivery partner earning ₹50,000 monthly through Swiggy. Under existing GST provisions, the partner may become individually liable for GST if their annual turnover exceeds ₹20 lakh. However, by designating Swiggy as the Marketplace Facilitator, the platform could centralize GST collection on behalf of the delivery partner. This would not only reduce the compliance burden for gig workers but also ensure timely and accurate tax remittance, streamlining the entire process.

Implementing such principles in India would necessitate robust infrastructure to track and monitor transactions. A digital compliance portal, akin to the streamlined sales tax tools used in the US, could automate tax calculations, filings, and reconciliations. For instance, a gig platform like Urban Company could integrate with such a portal to ensure real-time tax compliance, including tracking services rendered, GST collected, and liabilities discharged. This system would enhance transparency and significantly reduce administrative burdens for smaller operators lacking advanced technological resources.

Integrating economic nexus thresholds and Marketplace Facilitator rules into India’s GST framework could simplify compliance, improve revenue collection, and resolve existing ambiguities for gig platforms. These reforms would align with the dynamic nature of India’s gig economy, fostering its growth while ensuring a fair and transparent tax system that benefits both platforms and service providers.

Conclusion: Paving the Path for a Future-Ready Taxation Framework

India’s digital economy stands at a pivotal moment, fueled by rapid technological advancements, innovative business models, and the exponential growth of the gig economy. Operating within a quintessentially VUCA (volatility, uncertainty, complexity, and ambiguity) environment, the country faces significant taxation challenges, particularly for e-commerce operators (ECOs). The volatile growth of platforms in the gig economy often outpaces the regulatory framework, leaving policymakers struggling to keep pace. Uncertainty over the classification of digital transactions—whether taxable or exempt—further complicates compliance, especially for platforms experimenting with unconventional models like commission-free monetization.

The complexity of India’s GST regime, marked by state-specific compliance requirements and provisions such as Section 9(5) and TCS under Section 52, reflects the interlinked challenges of the VUCA landscape. Platforms grapple with reconciling supplier data, adjusting TCS for returns, and adhering to cross-border taxation rules. Ambiguity arising from inconsistent rulings by tax authorities exacerbates these challenges, increasing the risk of disputes and leaving businesses uncertain about their liabilities. Recognizing and addressing these elements is essential for developing a robust, adaptive, and equitable taxation framework.

Global best practices offer valuable insights into addressing these challenges. The EU’s One-Stop Shop (OSS) mechanism demonstrates the advantages of centralized compliance systems in reducing administrative burdens and fostering transparency. Similarly, the US’s economic nexus laws underscore the importance of linking tax liabilities to a business’s economic presence, ensuring fairness in the tax system. Both approaches prioritize simplicity and equity, offering practical solutions that India could adapt to address the complexities of its GST regime.

To build a future-ready taxation framework, India must prioritize reforms that simplify compliance, enhance equity, and promote inclusivity. Adopting an OSS-inspired centralized filing system would streamline GST processes by allowing platforms to consolidate state-wise transactions into a single return. This would reduce operational costs, improve efficiency, and alleviate the burden on gig platforms and e-commerce operators managing large transaction volumes. Introducing economic nexus thresholds would ensure offshore digital platforms generating substantial revenue from Indian markets contribute to the tax base, aligning the system with the realities of the digital economy.

Addressing compliance complexities, cross-border taxation, and inconsistent rulings requires clear, forward-thinking policies supported by technological innovations. AI-driven data reconciliation and blockchain-based transparency tools could enhance accuracy, reduce errors, and minimize disputes. Tailored support mechanisms for smaller players, such as simplified compliance thresholds and subsidies for technological adoption, would encourage broader participation in the formal tax structure while fostering innovation and competition.

India’s efforts to refine its digital taxation framework transcend the immediate goals of plugging revenue gaps or increasing collections. The ultimate aim is to create a system that supports businesses, safeguards consumer interests, and aligns with global standards. By learning from international practices and addressing its unique challenges, India has the opportunity to position itself as a leader in the global digital marketplace. A robust, adaptive GST framework will not only strengthen India’s tax base but also empower its digital economy to thrive in an increasingly interconnected world. The time for reform is now, as India’s digital future hinges on the creation of a fair, inclusive, and future-ready taxation system.

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[1] NITI Aayog, India’s Booming Gig and Platform Economy: Perspectives and Recommendations on the Future of Work(June 2022) https://www.niti.gov.in/sites/default/files/2022-06/25th_June_Final_Report_27062022.pdf.

[2] Ibid.

[3] International Labour Organization, Expansion of the Gig and Platform Economy in India: Opportunities for Employer and Business Member Organizations (2024) https://www.ilo.org/sites/default/files/2024-04/ILO%20Platform%20workers%20and%20EBMOs%20India%20Report_3%20April%20%28LIGHT%20PDF%29.pdf.

[4] Gavin Wright and Ivy Wigmore, 'What is VUCA (volatility, uncertainty, complexity and ambiguity)?' (TechTarget, 2024) https://www.techtarget.com/whatis/definition/VUCA-volatility-uncertainty-complexity-and-ambiguity.

[5] Boston Consulting Group and Michael & Susan Dell Foundation, Unlocking the Potential of the Gig Economy in India(2022) https://media-publications.bcg.com/India-Gig-Economy-Report.pdf.

[6] Central Goods and Services Tax Act 2017, s 2(44).

[7] Central Goods and Services Tax Act 2017, s 2(45).

[8] Central Goods and Services Tax Act 2017, s 52 and s 9(5) https://cbic-gst.gov.in/pdf/CGST-Act-Updated-30092020.pdf.

[9] Central Goods and Services Tax Act 2017, s 52.

[10] Ministry of Finance (Department of Revenue), Notification No. 01/2024-Integrated Tax (10 July 2024) https://pib.gov.in/PressReleasePage.aspx?PRID=2087659

[11] “TCS Applicability (GST): Electronic Commerce Operator” (TaxManagementIndia) https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=9784.

[12] Central Goods and Services Tax Act 2017, s 9(5).

[13] ClearTax, 'GST on Notified Services by E-Commerce Operators u/s 9(5)' https://cleartax.in/s/gst-on-notified-services-ecommerce-operators-95.

[14] Ministry of Finance, 'GST Clarification on Food Delivery Services' (Circular No. 167/2021, 2021) https://cbic-gst.gov.in/pdf/Circular-167-17-12-2021-GST.pdf.

[15] Goods and Services Tax Network (GSTN), 'Electronic Credit Ledger: User Guide' https://tutorial.gst.gov.in/userguide/ledgers/Electronic_Credit_Ledger.htm.

[16] Goods and Services Tax Council, 'New Table 3.1.1 in GSTR-3B for Reporting Supplies Notified u/s 9(5)' (19 July 2022) https://tutorial.gst.gov.in/downloads/news/gstr_3b_sec_9_5_advisory_19_07_22.pdf

[17] ClearTax, 'GST on Notified Services by E-Commerce Operators u/s 9(5)' https://cleartax.in/s/gst-on-notified-services-ecommerce-operators-95.

[18] Government of India, Finance Bill 2024 https://www.indiabudget.gov.in/doc/Finance_Bill.pdf.

[19] Government of India, Memorandum Explaining the Provisions in the Finance Bill, 2024https://www.indiabudget.gov.in/doc/memo.pdf.

[20] Ibid.

[21] Government of India, Digital India Programme (2022) https://www.digitalindia.gov.in.

[22] Central Goods and Services Tax Act 2017, s 2(45).

[23] Central Goods and Services Tax Act 2017, s 52.

[24] Roppen Transportation Services Pvt Ltd, Karnataka Authority for Advance Ruling, Advance Ruling No. KAR ADRG 29/2024, decided on 7 September 2024 https://gst.kar.nic.in/Documents/General/ROPPENTRANSPORTATION29724.pdf.

[25] Multiverse Technologies Private Limited, Karnataka Authority for Advance Ruling, Advance Ruling No. KAR ADRG 17/2021, decided on 24 June 2021 https://gstcouncil.gov.in/sites/default/files/AAR/multi-verse_technologies_private_limited_1.pdf.

[26] Juspay Technologies Private Limited, Karnataka Authority for Advance Ruling, Advance Ruling No. KAR ADRG 14/2021, decided on 18 June 2021 https://gstcouncil.gov.in/ms-juspay-technologies-pvt-ltd.

[27] Humble Mobile Solutions Pvt Ltd, Karnataka Authority for Advance Ruling, Advance Ruling No. KAR ADRG 40/2021, decided on 31 August 2021 https://gstcouncil.gov.in/humble-mobile-solutions-pvt-ltd.

[28] Opta Cabs Private Limited, Karnataka Appellate Authority for Advance Ruling, Appeal Order No. KAR AAAR 08/2021, decided on 15 October 2021 https://gstcouncil.gov.in/opta-cabs-private-limited-0.

[29] TaxGuru, 'Balat Enterprises Liable to Pay GST on Services Provided via Vyayshay App' (TaxGuru, 2024) https://taxguru.in/goods-and-service-tax/balat-enterprises-liable-pay-gst-services-provided-vyayshay-app.html#google_vignette.

[30] TaxGuru, 'GST Implications of Selling Digital Gold on a Platform: Karnataka AAR' (TaxGuru, 2024) https://taxguru.in/goods-and-service-tax/gst-implications-selling-digital-gold-platform-karnataka-aar.html.

[31] TaxGuru, 'Post-Sale Discounts and Incentives: GST Implications and Treatment' (TaxGuru) https://taxguru.in/goods-and-service-tax/post-sale-discounts-incentives-gst-implications-treatment.html#google_vignette.

[32] Authority for Advance Ruling (Gujarat), M/s Gensol Ventures Pvt Ltd, Advance Ruling No. GUJ/GAAR/R/48/2021, decided on 22 December 2021 https://gstcouncil.gov.in/sites/default/files/AAR/order_final_48_2021_gensol_ventures_pvt_ltd_26_2021.pdf.

[33] M/s Ultratech Cement Limited, Maharashtra Authority for Advance Rulings, Advance Ruling No. GST-ARA-34/2017-18/B-56, decided on 27 June 2018 https://gstcouncil.gov.in/sites/default/files/AAR/mah_aar_34_2017-18_b-56_27.06.2018_ucl.pdf.

[34] MRF Limited, Tamil Nadu Appellate Authority for Advance Ruling, Advance Ruling No. TN/05/AAR/2019, decided on 25 March 2019 https://gstcouncil.gov.in/sites/default/files/AAR/tn-05-aar-2019-mrf_india.pdf.

[35] Central Goods and Services Tax Act, 2017, Section 15(3)(b).

[36] Haryana Appellate Authority for Advance Ruling, M/s Haryana, Appeal No. HAAR/2018-19/01, decided on 23 October 2018 https://gstcouncil.gov.in/sites/default/files/2024-02/haryana_haaar_2018-19_01_dtd_23.10.18.pdf.

[37] Central Goods and Services Tax Act 2017, s 52.

[38] Central Goods and Services Tax Act 2017, s 9(5).

[39] Authority for Advance Ruling (Maharashtra), M/s Arihant Enterprises, Order No. 126/2018, decided on 20 December 2018 https://www.gstcouncil.gov.in/sites/default/files/AAR/ara_order_126_2018_maharashtra_arihant_ent.pdf.

[40] Appellate Authority for Advance Ruling (Rajasthan), M/s Resonance Eduventures Limited (Order, October 2024) https://gstcouncil.gov.in/sites/default/files/2024-10/resonance_edventures_aaar_order.pdf.

[41] Central Goods and Services Tax Act 2017, s 34.

[42] Finance Act 2023, s 122(1B).

[43] European Commission, 'VAT One Stop Shop (OSS)' (European Commission, 2024) https://vat-one-stop-shop.ec.europa.eu/one-stop-shop_en.

[44] Income Tax Department, 'Equalisation Levy' (Income Tax Department, 2024) https://incometaxindia.gov.in/Pages/equalization-levy.aspx#:~:text=Equalisation%20levy%20is%20charged%20at%20the%20rate%20of%202%25%20from,such%20levy%20shall%20be%20chargeable.

[45] GST Council, 'GST on E-Commerce Operators' (GST Flyer, Chapter 42, 2024) https://gstcouncil.gov.in/sites/default/files/e-version-gst-flyers/51_GST_Flyer_Chapter42.pdf.

[46] South Dakota v Wayfair, Inc 138 S Ct 2080 (2018).

[47] Quaderno, 'US Marketplace Facilitator Sales Tax Laws: Everything You Need to Know' (Quaderno Blog, 2024) https://quaderno.io/blog/us-marketplace-facilitator-sales-tax-laws-everything-you-need-to-know/.