The Central Board of Indirect Taxes and Customs (CBIC) has issued a significant clarification regarding the conditions for eligibility of Input Tax Credit (ITC) for e-commerce operators through its recent Circular No. 240/34/2024-GST, dated: 31-12-2024. This new guidance brings welcome clarity to the e-commerce sector, particularly concerning the treatment of ITC for services under Section 9(5) of the CGST Act 2017, which involves casting of GST liability on Reverse Charge Mechanism (RCM-though not exactly) basis as an aggregator.
2.Looking holistically, the e-commerce landscape in India has evolved significantly over the years, with platforms offering diverse services ranging from food delivery to ride-hailing. Understanding how these platforms should handle their tax liabilities and Tax credits has been a persistent challenge. This new clarificatory circular addresses these challenges head-on, providing clear direction for both established players as well as for the emerging platforms.
3.To understand the issues better how these changes impact daily operations let us go by an illustration. Now, consider “FoodDelight” a popular food delivery platform. “FoodDelight” operates like many other e-commerce platforms, facilitating restaurant deliveries while also earning through commissions and delivery fees. Under the previous framework, there was ambiguity about how they should handle input tax credits on their various expenses, such as technology services and marketing costs which will be common for all supplies.
4.The new clarification establishes that platforms like “FoodDelight” don’t need to reverse their input tax credits proportionately for services falling under Section 9(5) of CGST Act 2017 inviting liability under Reverse Charge Mechanism (RCM). This marks a significant shift from the earlier approach where many platforms struggled with complex calculations to determine the extent of ITC reversals. For instance, when “FoodDelight” spends ₹3,00,000 on advertising services with a GST component of ₹54,000, they can retain this entire ITC amount, regardless of the proportion of their RCM supplies under Section 9(5) of the CGST Act 2017. The framework introduces a clear distinction in tax treatment based on the nature of services. Consider another e-Commerce Operator “RideNow” a ride-hailing platform that facilitates taxi services while earning through commissions and booking fees. When “RideNow” generates ₹1,00,00,000 in ride revenues and ₹20,00,000 in platform fees, they must pay the GST on ride services (Section 9(5) supplies) entirely through cash. However, they can utilize their accumulated ITC for GST payments on their platform fees and commissions.
5.This dual mechanism brings operational clarity while ensuring tax compliance. Likewise, lets have another case, “HomeServices”, a home maintenance platform, which demonstrates how this works in practice. When they facilitate plumbing or electrical work under Section 9(5), they must pay the applicable GST in cash. However, for their platform fees charged to service providers, they can utilize their available ITC, optimizing their working capital management. It has been clarified vide question no. 6 of Circular No. 167/23/2021 – GST dated 17.12.2021 that the ECO shall not be required to reverse input tax credit on account of restaurant services on which he pays tax under section 9(5) of the CGST Act. It has also been clarified that the input tax credit will not be allowed to be utilized for payment of tax liability under section 9(5) and whole of the tax liability under section 9(5) will be required to be paid in cash. The principle, which has been outlined in question no. 6 of Circular No. 167/23/2021 – GST dated 17.12.2021, also applies to the supplies made in respect of other services specified under section 9(5) of CGST Act 2017 also. .In view of this, it is now made clear that Electronic Commerce Operator, who is liable to pay tax under section 9(5) of the CGST Act 2017 in respect of specified services, is not required to reverse the input tax credit on his inputs and input services proportionately under section 17(1) (not in the course or furtherance of business) or section 17(2) (exempted supplies) of CGST Act 2017 to the extent of supplies made under section 9(5) of the CGST Act 2017.
6.The circular also addresses the practical aspects of implementation. E-commerce operators need to maintain clear documentation distinguishing between their Section 9(5) services and their original platform services. This doesn’t require separate books of accounts but rather proper categorization within their existing accounting systems. For instance, when a platform incurs monthly expenses with GST components on office rent (₹50,000), technology services (₹1,00,000), and marketing (₹75,000), they can maintain a single ITC register while ensuring proper utilization tracking.
7.This apart, the real value of these clarifications becomes apparent when dealing with mixed services. Many platforms offer multiple services, like combining ride-hailing with food delivery. Under the new framework, importantly, they don’t need to perform complex ITC allocations between different services. Instead, they can focus on maintaining clear records of their Section 9(5) supplies and platform services, ensuring proper tax payment mechanisms for each category.
8.Be it as it may, transitioning to this new framework requires careful attention to accounting practices. Platforms must ensure their systems can clearly distinguish between GST liabilities that must be paid in cash (Section 9(5) services) and those that can be settled using ITC (platform services). This might mean updating accounting software and training finance teams, but the long-term benefits of simplified compliance outweigh these initial adjustments to be made. To implement these changes effectively, e-commerce operators should start by reviewing their current accounting practices. This involves identifying all Section 9(5) services they provide, mapping out their platform fees and commissions, and ensuring their accounting systems can track these separately. Regular reviews of GST compliance under this new framework will help identify any areas needing adjustment.
9.Looking ahead, these changes will likely contribute to the continued growth of India’s e-commerce sector. With clearer tax treatment guidelines, platforms can better plan their operations and manage their working capital. The simplified framework also makes it easier for new players to enter the market, potentially leading to increased competition and innovation in the sector. For tax practitioners and finance professionals working with e-commerce platforms, these clarifications provide a clear roadmap for advising clients and ensuring compliance. The elimination of proportionate reversals and the clear distinction between payment mechanisms for different types of services makes their advisory role more straightforward while ensuring accurate tax treatment.
10.As the e-commerce sector continues to evolve, this framework provides a solid foundation for future growth while ensuring proper tax compliance. The clear guidelines on ITC treatment and tax payment mechanisms represent a significant step forward in India’s journey toward a more streamlined and efficient GST system. The CBIC’s clarification represents a significant step toward simplified tax compliance in the e-commerce sector. By eliminating the need for proportionate ITC reversals and providing clear guidelines on tax payment mechanisms, it reduces complexity while ensuring proper tax collection. This allows e-commerce operators to focus more on their core business operations while maintaining compliance with tax regulations.
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