Start-up industry body IndiaTech.Org has sought a review of GST on online transactions as it is adversely impacting small businesses and travel companies.

In a communication to the Finance Minister, Road and Transport Minister, IT Minister, DPIIT, GST Council, and several state governments, the industry body said that the move will impact small retailers, start-ups and travel companies who have just began selling online.

Currently, businesses that supply goods up to the revenue of ₹40 lakh and those that supply services up to revenue of ₹20 lakh don’t have to pay additional GST, irrespective of whether they are selling online or offline. According to a recent update in rules, businesses will lose this benefit when selling online. This means that even small and early stage companies will have to pay GST if they sell online, irrespective of the revenue. As a result, small businesses now have to mandatorily register under GST when selling online.

Impact on transport sector

One of the segments to be drastically impacted is the online travel ticketing space, especially non-AC buses and transports.

IndiaTech.Org’s letter, accessed by BusinessLine, said, “Transportation services provided by way of non-air-conditioned contract carriage and stage carriage are currently exempt from payment of GST. However, the government, vide Notification 16/2021-CGST (Rate) and Notification No 17/2021-CGST (Rate) dated November 18, 2021, intends to make online operators liable to pay GST in respect of these services when supplied through any online means. Thus, the aforesaid services, which are per se exempt under GST law, become taxable merely because they are supplied online through many travel start-ups.”

‘Incentivise offline booking’

“The above move will not only increase the overall cost of such services booked through online means as compared to the same booked offline by standing in the bus top or queuing in places where tickets are sold. It will counter start-ups emerging in this space and unnecessarily force travellers to book tickets offline, which may never have been the intent of the government that aims to promote digital and start-up growth,” the letter said

This not only hampers start-ups catering to segments like bus aggregation, but also impacts vehicle drivers of basic mode of transports like auto rickshaw drivers. This will lead to some part of the burden of costs falling on customers of such services and eat up the margins of the poorer sections of auto drivers, it added.

IndiaTech.Org urged the government “to continue exemption on transportation services provided by way of non-air-conditioned contract carriage and stage carriage, whether or not supplied through online means”.

Impact of previous amendment

In a separate second letter, IndiaTech.Org highlighted the issues faced by early-stage start-ups and smaller businesses involving artisans and cottage industry when another set of amendments to GST rules were implemented, stripping these businesses off their benefit of not having to pay GST up to a certain threshold of revenue.

Rameesh Kailasam, CEO, IndiaTech.Org, told BusinessLine, “These GST rules directly contradict the government’s mission of Digital India. The Ministry of Commerce and Industry too has been encouraging SMEs and start-ups to digitise and go online. During the pandemic, many businesses went online to survive and sell their products, which in turn gave them access to new customers, wider geographies and improved their cash flows.”

Compliance burden

The letter Kailasam wrote mentioned, “This puts small businesses desirous of selling online at a severe disadvantage in terms of additional costs and compliance formalities that kick in. The threshold limits were originally thought through by the GST Council and brought in because small businesses could neither afford nor comply with such requirements.”

Today, not having a GST number has forced many MSMEs and small businesses falling below the prescribed thresholds to remain ineligible for selling online on any e-commerce portal or application. While several state governments and Central ministries are keenly working to bring more and smaller businesses on to online platforms, this rule has become a major deterrent and is beginning to take a toll on MSMEs, small businesses, women-run individual businesses and also a large number of traders, artisans, craftsmen, cottage industries and many others.”

‘Unfair distinction’

Sijo Kuruvilla George, Executive Director, Alliance of Digital India Foundation (ADIF) — which represents over 490 start-ups — told BusinessLine, “This distinction between online and offline business is unfair. The new GST norms will create an entry barrier for start-ups looking to sell online. In terms of ground reality, with marketplaces like Amazon not allowing sellers without GST registration, ineligible and smaller businesses already have limited access to the largest marketplace in the country. They will now have additional hassle and overhead compliance costs in the tune of at least ₹10,000-20,000. Interestingly, not all of our start-up partners and their chartered accountants we reached out to are aware of the new rules.”

“Moreover, the definition of online services by the GST council is wide and unclear. Some sellers are selling on platforms like Instagram where conversations happen in DMs and payments are made on Paytm. Through these rules, online sales are in a way being penalised. For some start-ups, after paying 20-40 per cent in commission to marketplaces, paying another 18 per cent of GST will take away their margins,” he added.