What role does GST play in today's Era of Drop Shipping Business?
The advent of the 21st century has ushered in the era of globalisation and has broken away all the trade barriers by transformation of all industries through the e-commerce platform. No wonder the techno savvies have been always ahead in this fray, the complex jargon has been a hindrance for many laymen. One such term that is being used very often these days in the realm of e-commerce trade is of High Sea Sales or Drop Shipments.
Dropshipping is a concept which has much relevance in the GST regime but has not been elaborately defined in the new indirect tax statute.
So, it is worth knowing about the much significant domain of Dropshipping that is all set to witness major changes since the beginning of GST registration procedure in India.
#1. What is all about the concept of Dropshipping?
Drop shipment is a system that allows a trader to sell the goods without actually possessing the goods or the inventory. He instead transfers his customer’s orders directly to the manufacturer or the wholesaler of such goods, who then transport the goods directly to the buyer.
In today's digital era, the Drop shipment concept is becoming rampant in the e-commerce business.
#2. What are the implications with respect to GST if Drop shipment is done outside India?
The whole scenario of Drop shipment and its impact with regard to GST tax can be well understood with the help of a case study:
Let us say, India (X) received an order from USA (Y) to send the finished goods. For the said shipments, India (X) ordered the said goods from China (Z) and directed them to ship the said goods directly to USA (Y) and for that, India issued the invoice to China (Z).
The aforementioned case study draws out a dilemma that whether GST is applicable with reference to the above transaction i.e. between X (India) and Y (USA) on the direct consignment of the goods from Z (China). Here, India (X) actually taking no physical possession of the ordered goods into its territory but is supplying directly Chinese goods to the USA.
#3. How will the applicability of GST be ascertained in international dropshipping?
It is imperative to grasp that for GST shall be applicable on any transaction, based on whether it is Interstate or Intrastate Supply.
#4. Whether international dropshipping will be interstate or intrastate supply under GST?
In accordance with the Section 7 of the IGST Act:-
- If the supplier is located in India and destination is outside India, the supply of goods shall be considered interstate supply.
Hence transaction between India (X) and USA (Y) is interstate supply.
- In case of imports, the supply shall be treated as ‘supply in the course of Interstate trade or commerce’, if the goods have entered into the customs barrier of India.
Hence transaction between India (X) and China (Z) shall neither be treated as interstate nor intrastate supply, as per the IGST provisions.
No doubt that, in both types of transactions, the dealer requires the unique Import Export Code.
Based on the above 2 postulates, we can now determine the GST applicability in the present case.
#5. How will the transaction between India and USA be treated as per IGST Act?
- Since the supply of goods from China to the USA is interstate supply, IGST would be applicable.
- Here, the supplier was located in India and destination of supply is outside India, i.e. USA. The same can be treated as export.
- Furthermore, the government of India in order to promote exports, with the intent of boosting forex reserves has given the provision of refund of IGST on exports.
- Additionally, the exporter can do drop-shipping export without payment of IGST by filing a Letter of Undertaking (LUT).
To get assistance on the process of filing LUT, you can consult our business adviser at 8881-069-069.
#6. How will the transaction between India and China be treated as per IGST Act?
As we discussed above, the transaction between India and China shall neither be treated as interstate nor intrastate supply. Hence, IGST wouldn’t apply here.
In order to start an international drop-shipping business, you need two necessary documents-
In case you need any assistance concerning GST registration in India or IEC registration, feel free to contact us at 8881-069-069.