GST ON DROPSHIPPING BUSINESS
Dropshipping is a business where the seller sells goods which he does not own at the time of selling goods but then passes the order to a third party after receiving the order. Such a third party then delivers the order to the purchaser.
For example, a person has a website where he sells ladies' bags. He has entered into a contract with the wholesalers of such items. He takes orders on his website and then passes such orders to the wholesaler, such wholesaler sends goods to the purchaser through courier. The person pays to the wholesaler the price of the product agreed upon and courier charges. The person earns the margin in between.
The dropshipping business is increasing at a rapid pace. Since the person doesn’t purchase the goods in advance, there is no investment and no risk of dead stock. He can focus on just selling and marketing.
Dropshipping business is not conducted by Amazon, Flipkart. Amazon and Flipkart are marketplaces, they do not issue invoices to purchasers on their sites but the seller issues the invoices. While in dropshipping the person directly issue the invoices.
APPLICABILITY OF GST ON DROPSHIPPING
When goods are purchased and sold within India:
A person Rahul is doing dropshipping business, he enters into a contract with Prajwal to produce goods when the order arrives. Now Rahul receives an order from Mahesh. Rahul will take payment from Mohan and issue an invoice to him. Rohit will send the order to Prajwal which in turn sends goods to Mohan but didn’t issue an invoice in his own name. He is just sending goods to Mohan on behalf of Rahul.
Prajwal will issue an invoice to Rahul because he had sold goods to Rahul and not Mohan. Rahul can take the input tax credit of such an invoice.
Both Prajwal and Rahul are required to take registration if the turnover is more than the specified limit of Rs. 20/10 lakhs. Also, registration is required if sales are made outside the state/union territory in which the seller has his place of business.
When goods are sold outside India:
When goods are sold outside India then the drop shipper has to charge GST in a normal manner from the person in the dropshipping Business (merchant). It will be export sales for the merchant and he has the option to either file Letter of Undertaking (LUT)and sells without GST or he can pay IGST at the time of sale and then apply for a refund afterward.
GST on Dropshipping business when goods are purchase from outside India
If the drop-shipper is outside India then the merchant has to pay IGST on a reverse charge basis at the time of import of goods. The merchant will issue a normal GST invoice with CGST/SGST or IGST as applicable.
The merchant will get the input tax credit of such IGST paid at the time of import of goods.
GST on Dropshipping business when goods are purchased from outside India and sold outside India without goods entering into India
In this case, it is neither export of goods and nor the import of goods.
Schedule III of CGST Act states the transactions or activities which shall be treated neither as a supply of goods nor a supply of services. Para 7 is added to this schedule in CGST amendment act 2018. “Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.” Therefore, if sales are made by an Indian business in which goods are purchased outside India and sold outside India then such transaction is not considered as supply. And therefore levy of GST doesn’t arise.
Services used in such transaction:
The merchant may use many services in such a transaction. The services of courier or freight forwarder are used to transport goods. And in many cases services of a third party to inspect goods (goods inspection services) are used to assure the quality of goods.
whether such services are considered as the import of services?
Section 2(11) of IGST act defines the import of services as
Import of services means the supply of any service, where––
Therefore, a transaction which satisfies all three conditions is considered as an import of services.
Section 13(5) of the IGST act states that when “services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services” then the place of supply will be the location where services are actually performed. Therefore, in the case of goods inspection services, the place of supply will be the place where such inspection is made. And thus all three conditions are not satisfied and not treated as an import of services. GST is not required to be paid on a reverse charge basis.
For the purpose of transportation services, the place of supply is considered as the location where the goods are destined to be reached. In this case, goods are also sent to a place outside India, therefore such service will not be considered as an import of service, and GST not payable on reverse charge.
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