The GST Puzzle: Are Electronic Commerce Operators the Service Providers or Just Facilitators?

With the constant advancement in technology, new and complex business models are emerging, reshaping traditional industries and creating innovative opportunities in the e-commerce sector. Historically, our tax laws have struggled to keep pace with continuous technological developments and the emergence of innovative business models, leading to various legal ambiguities as to the proper course of compliance. 

One such ambiguity which is persisting since the inception of GST law pertains to whether the electronic commerce operators (ECOs) are service providers or just the facilitators. 

While some ECOs function under the inventory model, directly selling goods or services to consumers on principal-to-principal basis, others operate under the marketplace model, merely facilitating the provision of goods and services between third-party suppliers and users. 

It is the ECOs working under a marketplace model which are under a constant scrutiny of the tax authorities. Tax demands are consistently raised on ECOs working as food aggregators and other ECOs, primarily due to the ambiguity surrounding the question of “who is the supplier of services? – is it the ECO or the third-party supplier”. 

Tussle between ECOs and tax authorities

Tax authorities are taking the view that ECOs are supplying services to their users, as they undertake essential functions that constitute an integral part of the transaction. These include collecting the fees towards the services and processing it. This viewpoint revolves around the significant control of ECOs in the transaction and their role in enabling the transaction, which essentially makes ECOs the service providers. 

On the flip side, ECOs contend that they are merely facilitating the supply of services between the third-party suppliers and users by way of providing them with a digital platform to connect. This viewpoint is being supported by compliance with TCS provisions under GST wherever applicable and highlighting that they are not contractually liable for the services provided by third-party suppliers.

The above difference in viewpoint can be illustratively explained in the following manner – 

ECO “X” is engaged in aggregation of delivery services for its users and connects onboarded delivery partners with users. Such delivery partners are independent service providers and gets paid basis the number of deliveries undertaken by them. However, ECO through its app/website connects delivery partners with the users, give necessary instructions to the delivery partners, collect payment and also helps in resolving disputes if any between users and the delivery services.  Tax authorities are taking a view that X is effectively the supplier of delivery services to the users, and therefore should charge GST on such delivery services. 

Whereas as per the viewpoint of ECOs, X is a mere facilitator of delivery services between the delivery partners and the users.  It may be noted that unlike ECO, most of such delivery services partners are usually unregistered under GST and therefore if they provide delivery services directly to the users, such services will not attract GST, which seems to be bone of contention for the tax authorities.

ECOs – a facilitator or a service provider

It is pertinent to note that the viewpoint of ECOs is underscored by the legislative framework outlined under Section 9(5) of the Central Goods and Services Tax Act, 2017 (CGST Act). This provision imposes a liability on ECOs to pay GST on certain notified services provided through their platform as if such ECOs are the supplier of services.

After carefully perusing the legal framework, a doubt may arise that if ECOs acting as an aggregator were indeed the service provider as being argued by the tax authorities, then there would have been no need to create a deeming fiction in the form of Section 9(5) under the GST law. This provision was specifically inserted to ensure that GST is levied and collected on services provided through an ECO, particularly in cases where such services would otherwise not be subject to GST on account of the status of third-party suppliers being unregistered under the GST law. In other words, the fact that Section 9(5) has been specifically inserted under the GST law, ipso facto means that the ECOs are facilitating the supply between the third-party suppliers and users.

Further, the contractual arrangements between the ECO and the third-party supplier will play a crucial role in determining the question related to “who is the service provider?”. If, upon the perusal of the contractual arrangement, it is clearly coming out that the third-party supplier is the service provider and all associated risks and responsibilities are assumed by the third-party supplier, then it provides a strong basis and case for ECOs to argue that they are not the service providers. Given this mutual understanding between the parties, any contrary view would undermine the settled principle of law that a transaction should be construed in accordance with the contractual understanding between the parties. 

An analogy can be drawn from the legal disputes faced by Uber internationally, where, based on its contractual understanding with Uber drivers, various courts have consistently opined that Uber drivers should be treated as independent contractors, rather than employees of Uber.

What’s in it for the Government?

The Government has notified a limited set of services on which ECOs are required to pay GST as if they are the supplier of these services. However, apart from these notified services, there are numerous other services which are provided through ECOs, wherein ECO is only liable to pay GST on their own services and not on goods/services supplied by the underlying supplier. Therefore, without treating the ECO as a service provider, the services provided by these third-party suppliers would not be subject to GST. 

Way forward

One way to address this issue is to come up with clarificatory circular wherein detailed guidelines are provided on the position of ECOs as well as instructions to officers to deal with cases pertaining to the past period. 

The food aggregators were anticipating a clarification from the 55th GST Council Meeting. However, all the issues could not be concluded in the 55th GST Council Meeting, leaving the issues concerning the e-commerce sector to be resolved by the upcoming meetings of the GST Council. 

Alternatively, the Government may also consider notifying certain services under Section 9(5) of the CGST Act, thereby deeming such services to be supplied by ECOs. This approach would at least give some tax certainty to ECOs on the treatment of such transactions.

However, the time will only tell whether the disputes between ECOs and tax authorities will be resolved through a judicial or legislative intervention.