GST and Statutory Compliance under Dropshipping business

1) What exactly is the Business Model of Dropshipping ?

The business model is some what like a middle man between the supplier and prospective customer. But in this neither the supplier or Seller knows about each other.

In this Supply Chain Management System the Consignor who carried out the sale through his Website/App never possess the goods or Inventory in his or her hands and as a middle man transfers the Order detail to Manufacturer/Supplier. Now the supplier will directly make the supply of Goods to the Buyer directly.

Generally in India we enter in to contract with Chines Manufacturers or Suppliers for Supply of the Products. This products are listed on Website with attractive Images and Description of Products, sales may be carried out with in India or Outside India in developed country.

2) Legal compliance under Dropshipping business.

a) Formation of Proprietary/Partnership Concern or Company.

b) Entering of contract with Supplier/Manufacturer.

c) GST and Customs Compliances.

In this we shall have a look on GST and Customs requirements.

3) Applicability of Goods and Service Tax(GST) in Dropshipping.

Under this business model there can be mainly Three types of seller that is one who makes sales outside India or Making sales in India or both.

i) Sales is made Outside India:

In case of Sales as per Section 7 of IGST Act: If the supplier is located in India and destination is outside India, then the supply of Goods shall be considered as Interstate supply. So in such case IGST is applicable.

So in case of Export sales, since the price on the website of seller will the final receivable amount and should be inclusive of all taxes the GST compliance becomes extremely Important to determine sales price. Export can be made either by paying  under LUT or by paying IGST and claiming refund later on. 

In case of purchase from supplier: Since the goods does not entered the customs border of India as the goods will be directly send to final buyer the same is not considered as Import of Goods. And  the same shall not be liable to GST or Custom duty.

ii) Sales is made in India.

In case of Sales with in India :The place of supply shall be with in India and accordingly IGST or SGST+CGST shall be levied. In this case determination of the Place of recipient is very Important as the applicable GST will be determined accordingly.

In case of purchase from supplier: Under this since the goods enters the custom border of India the same shall be treated as Import and both Customs Duty and GST under reverse charge basis are applicable. The tax credit of GST paid for Import shall be available to the supplier.

Under this case the website owner is liable for both collecting GST and paying the same. Determination of Tax Inclusive Sales Price is extremely Important as the sales price shall Include both Import Duty and GST paid.

4) Import and Export Code.

Since the goods are Exported in first case or Imported in second it becomes mandatory to have an IEC code.

5) Entering of contract with seller.

If you want to excel in this business model it becomes extremely Important to have a proper contract and to sale the product in your brand name. It shall be ensured that the sales are made under your brand name and there are no direct contact details of seller in the product.

Your contract terms shall clearly indicate the delivery terms, payment terms, tenor of contract and any other ancillary charges. If possible the seller should ask for sample if the item is low price item or to take a visit to the suppliers factory before entering in to contract.

Disclaimer : The views, Expressions and opinions; thoughts and assumptions; analysis and conclusions expressed in this article are those of the authors and do not necessarily reflect any legal standing.

Author : CA Jugal Thakkar is a practicing chartered Accountant and, Involved in the area of GST  and Corporate Laws  and Can be reached at : [email protected].