Enforcing GST on E-commerce Transactions

Bilal Hassan

Likewise, services supplied by non-resident service-providers to resident customers are subject to VAT/GST if, under the place-of-supply rules, the services are deemed to be supplied in the customer’s country; services that are deemed to be supplied outside the country are treated as outside the scope of VAT/GST system.

However, since VAT/GST is a consumption tax, imposing VAT/GST on business-to-business (B2B) transactions does not generate any net tax revenues because businesses engaged in taxed transactions are entitled to recover VAT/GST paid on their business expenses (deduction of input VAT/GST).

The increasing popularity of the internet (development of ‘e-commerce’) has had the effect that not only businesses but also private individuals (final consumers) increasingly buy goods and services from abroad (business-to-consumer—B2C—transactions). Countries obviously have a financial interest in ensuring that VAT/GST is collected on imported goods and services destined for final consumers because final consumers are not entitled to recover VAT/GST paid on the purchase of goods and services. Since VAT/GST is a consumption tax, services supplied by resident service-providers to non-resident recipients should not be taxed if consumption takes place abroad.

The upswing of e-commerce has led to special VAT/GST rules relating to cross-border supplies of goods and services, in particular telecommunications services and electronic services (electronically supplied services).

Finally, e-commerce has also led to the phenomenon that businesses all over the world offer on their websites goods and services that are actually being supplied by a third-party supplier. Those websites act as an electronic platform and the customer may not even know who the actual supplier is. In terms of VAT/GST, the operator of an electronic platform may be the actual supplier or may act as a disclosed or undisclosed agent. For VAT/GST purposes, it is of essential importance to determine which party (the actual supplier or the (undisclosed) agent) is liable for VAT/GST on the underlying transaction, and to ensure that non-resident tax debtors comply with their national VAT/GST obligations. 

From the perspective of VAT/GST, the concept of “e-commerce” itself has no relevance. The relevance of “e-commerce” is that it has led to an enormous increase in cross-border supplies of goods and services. Not relevant is how the goods or services are ordered (by telephone, by printed order form or through the internet). It is also irrelevant how the goods and services are delivered, albeit that special rules apply to specific services that are delivered through the internet.

Domestic supplies (between resident suppliers and resident customers) are obviously subject to VAT/GST. More interesting is how cross-border supplies (between non-resident suppliers and resident customers and between resident suppliers and non-resident customers) are treated in order to ensure that domestic consumption of goods and services is actually subject to VAT/GST, and that consumption of goods and services outside the country is relieved from the burden of VAT/GST.

The upswing of the internet (e-commerce) has also led to the phenomenon that businesses all over the world offer on their websites goods and services that they supply themselves or that actually being supplied by a third-party supplier. Those websites act as an electronic marketplace and the customer may not even know who the actual supplier is. In terms of VAT/GST, the operator of the platform (electronic marketplace) may act as a disclosed (intermediary) or as an undisclosed (commissionaire) agent.

Generally speaking, if the operator of an electronic marketplace acts as an undisclosed agent (commissionaire) between the actual supplier and the customer, the agent is treated as the party who makes the supply to the customer. The undisclosed agent must issue the invoice in relation to the supply and is liable for remittance of the VAT/GST due on the transaction. In B2B scenarios, the reverse-charge mechanism applies if the operator of the electronic platform is not resident.

By contrast, where the operator of an electronic marketplace acts as a disclosed agent (intermediary) between the actual supplier and the buyer of goods or services, the actual supplier makes the supply to the customer. In that scenario, the invoice may be issued by either the actual supplier or the agent, if the agent is registered for VAT/GST. In B2B scenarios, the reverse-charge mechanism applies if the actual supplier is not resident.

Since the reverse-charge mechanism for services is limited to B2B transactions, the tax authorities must ensure that VAT/GST is collected on imported services consumed by private resident individuals, which is virtually impossible or excessively difficult if the supplier or service-provider is established abroad or if the operator of an electronic platform (undisclosed agent) is established outside the country.

As e-commerce is in particular associated with an explosive growth of B2C cross-border transactions, the VAT/GST rules need additional arrangements to ensure that domestic consumption of goods and services is properly taxed.

The writer serves as Additional Director Intelligence and Investigation (IR), Federal Board of Revenue.