E-Commerce has resulted in a change in the way we buy goods and services. After the surge in the use of smartphones, there were numerous new ways that can be utilized to help people in many ways. The potential with smartphones and technology gave rise to the idea of using smartphones to buy and sell goods and services. It’s just because of VAT.
Not more than two decades ago, buying something from the comfort of our homes with just one small device in our hands used to be a dream but now this has become a reality. With this reality, there are numerous other things that surface with it. The idea of selling and buying goods online is a thing asked by everyone but the effort that goes to make this happen is immense.
The taxes levied on the selling of goods online is one of the hurdles vendors and small businesses face in order to cope up with the demand for these services. It may be frustrating for businesses especially small businesses to know about all the taxes that are levied on different goods and services. It can get real complex real fast to know and calculate all these taxes.
To make your problems never get solved there has been a revision in the taxes. We know how you feel and that’s why we offer you our CA for income tax service so that you don’t have to put too much load on yourself just to make sure that the taxes are done nicely.
As a dealer or small business, you must be aware of all the changes that are made in VAT and how that affects you. Knowing all this will help you with reducing the amount of time spent on calculating different taxes and devising a new strategy to get the business running.
What is VAT?
VAT (Value Added Tax) is a tax on service and goods which is levied by the government on producers of that product or service. This tax is applicable when the services or goods are sold to consumers. The way this tax is levied is different from other taxes. It is a multi-stage tax and hence is applicable on each step of production of any good or service which will be purchased by the consumers at the end of the chain. VAT is applied to both the local goods as well as the imported goods.
As we have told you that this tax is similar for both the local and international products which make the whole thing difficult for the SMEs in our country. Small and Medium businesses don’t necessarily have the resources to handle all that change in their business without the guidance of an expert.
The truth about this tax is that it is levied on goods that are purchased by the consumers at the end of the chain and they are the ones who are paying this tax indirectly. The tax is however levied on the producers and they are accountable to pay this tax but the tax is taken from customers or end-users when they purchase the goods or services.
This practice is not new and is a common practice in the industry. There are numerous taxes that are paid by the customers when they buy a product or service.
Although VAT is an integral part of the GDP of any country and is revised according to the needs of the nation. Many times, the tax is increased on specific goods in order to target a specific audience or reduced to make necessary goods available to all.
Why is VAT required?
You may have this question: why is VAT required in the first place. Are Income tax and the other taxes not enough? Although things are not that easy.
India is one of the last countries to make VAT a form of tax. Other countries have already done this and this model has been successful since then.
There needs to be some sort of taxation process that covers the e-commerce business and VAT is the answer to that, not only in India but in other countries too.
The taxation process in India was believed to be exploited by the businessmen and other large enterprises which had the power to do so. There used to be numerous cases where businessmen have exploited the loopholes in the taxation system and made a profit for themselves.
Little did they know that the money they are using is of the public and hence these taxes are introduced to minimize this evasion and to increase the transparency in the taxation system.
Tax payments are considered a topic that is not often talked about in India because people focus on getting away with some loopholes, VAT ensures that there is uniformity in the taxation process and everyone who is liable to pay tax is paying it through transparent ways.
Benefits of VAT
VAT is levied on multiple stages of production and often differs from one state to another.
- VAT is levied on each stage of production and hence this ensures that there are no loopholes to be exploited.
- VAT if enforced properly makes an important tool for tax consolidation for the country and can help in solving the fiscal deficit problems.
- VAT is a globally accepted taxation system and hence helps India to integrate better with global trade practices.
- The transparency achieved by VAT can be used as a tool to determine many different financial parameters of the nation.
Impact of COVID-19
Due to the Coronavirus, many nations have reduced the VAT to ensure that the goods and services can be easily available to customers even at a time like this. There are many reasons to do this and it became a common practice after the EU applied this in many countries.
The boom of the economy of almost every country came to a halt due to the situations and everyone is eager to come out of this as quickly as possible. The complete lockdowns across different nations resulted in a complete halt and affected both consumption and investments.
The supply chain was disrupted due to this in the worst way possible and there was not enough labour to support the work which then caused excessive stress on various industries and sectors. After the realization by the government that this halt is neither good for the economy nor for people many relaxations were given in the rules to kickstart the economy and one of the ways was to reduce the VAT at that time to make things easier for everyone.
Although the times have now changed and the long-decided changes that were meant to be implemented are now getting implemented.
In the wake of COVID-19, many European countries opted to liberalize their VAT in order for smooth trade between them and other nations as well. It was temporary in nature and now that the situation is in control these have gone back to normal. Many hotels and restaurants were provided aid in terms of VAT cut to make sure that they survive this pandemic and it has been really successful in the nations that implemented this strategy.
These new VAT rates are applicable from 1st January 2021 and will affect the trade in the European countries as well as the trade with the non-European countries.
The Current VAT Situations
So, if you are a business and you are providing your goods and services to some European nations then you will be having to register for the VAT number for the country where you are selling your products to.
This being said means that the businesses in European nations are struggling with their international competitors. The VAT rules for cross-border trade date back to the 1990s and since then there has been a lot of progress in the technological domain. Since that time the products and services are sold online.
The laws in the EU are strict and are to be followed accordingly. For companies operating in the EU Member states, they need to register separately for VAT in each of these countries making sure that a certain threshold is crossed.
New VAT Rules
The new VAT rules are aimed to solve these problems for EU businesses. Earlier it took a lot of legal hassle to pay VAT when the business operates in different countries. This makes the whole process difficult for entrepreneurs and hurts the EU strategy.
The EU wants to build a strong internal market where VAT is not seen as an obstacle if you are selling your goods in the European countries.
This is the reason the European Commission has decided to roll out new VAT rules for e-commerce. The goal of which are
- Modernizing the VAT rules
- Simplify the VAT obligations
- Reduce the exploitation of VAT fraud
- Fair trading ground for Local and International businesses.
What does it mean for Small Businesses?
The new change that will be in practice from July 1, 2021, will help businesses to pay their VAT easily. The mere thought to actually apply for different VAT numbers in different countries is frustrating and we too feel this.
Now you won’t be needing to apply for different VAT numbers if you are supplying products or services to any European country. You will be provided with just one and that’s it.
It will make this easier for you to know all the taxes that you are required to pay in those countries and they can be calculated really easily.
One good move that the Indian government made is to go paper-free for the invoices of the transactions. The businesses whose turnover exceeds Rs. 100 Crore are required to use the e-invoices mandatorily. This is to ensure transparency in the taxation system and to reduce the loopholes in the system.
Even if loopholes are exploited in the current system, they will be easily visible to the authorities and action can be taken towards them to ensure the trust is maintained with the trade unions.
Earlier this was done for only the B2B businesses but is now extended to B2C businesses too which will make sure that the SMEs are benefited from this.
Although for some entrepreneurs’ things may get messy and this may not be easy for them and for some nothing changes.
The best advice in this regard is to know the rules inside out and then strategize the future of your business with the advice of an expert and what good place to get one than your own home. We provide CA for small businesses and CA for income tax to make sure that you don’t get caught in this hassle.
The Future
With the changes in the taxation for VAT for e-commerce. You should get prepared for getting many more benefits from the government in terms of the ease to file tax although the increasing interest of governments towards e-commerce is a double-edged sword and can turn out in any of the possible ways.
Although the efforts are focused on increasing the country’s compatibility with other countries and ease of e-commerce which is the best choice for customers. To know much more in detail about the taxation for your business you should consider our CA for small business service and if you face problems in understanding the taxation system which keeps on changing then you may need a CA for income tax to get the job done easily.