GST on DropShipping Business

What is a dropshipping business?

Dropshipping is a business in which the seller sells the goods which he does not own at time of selling goods but then passes the order to a third party after receiving order. Such third party then delivers the order to the purchaser.

For example, a person has a website where he sells ladies purse. He has entered into contract with the wholesalers of such items. He takes order on his website and then passes such order to wholesaler, such wholesaler sends goods to the purchaser via courier. The person pays to the wholesaler the price of 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. 

Note that Amazon, Flipkart are not doing dropshipping business. They are marketplaces. Amazon and flipkart does 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 Rohit is doing dropshipping business, he enters into contract with Prateek to procure goods when order arrives. Now Rohit receives an order from Mahesh. Rohit will take payment from Mahesh and issue invoice to him. Rohit will send the order to Prateek which in turn send goods to Mahesh but didn’t issue invoice in his own name. He is just sending goods to Mahesh on behalf of Rohit.

Prateek will issue invoice to Rohit because he had sold goods to Rohit and not Mahesh. Rohit can take input tax credit of such invoice.

GST Registration – Both Prateek and Rohit are required to take registration if the turnover is more than the specified limit of Rs. 40/20/10 lakhs. Also, registration is required if sales are made outside the state/union territory in which the seller has place of business.

GST on Dropshipping business when goods are sold outside India but purchased in India

When goods are sold outside India then the dropshipper has to charge GST in normal manner from the person in dropshipping Business (merchant). It will be an export sales for the merchant and he has option to either file Letter of Undertaking (LUT) and sell without GST or he can pay IGST at time of sale and then apply for refund afterwards.

While the dropshipper is invoicing to the merchant, he can take benefit of Notification no. 40/2017 – Central Tax (Rate) and pay CGST and SGST at rate of 0.05% each or 0.1% IGST, as applicable. This benefit is subject to certain conditions as given in the notification. (read more on this in last of page)

GST Registration – Dropshipping business has to take registration if the turnover is more than the specified limit of Rs. 40/20/10 lakhs. However, registration is required if GST is payable on reverse charge. (see point of reverse charge)

GST on Dropshipping business when goods are purchase from outside India and sold in India

If the dropshipper is in outside India then the merchant has to pay IGST on reverse charge basis at 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 IGST paid at time of import of goods.

GST Registration – In this case, GST registration is required even if turnover is less than specified limits.

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 nor 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. Para 7 includes “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 is 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.

Section 2(10) of IGST act defines import of goods as

“import of goods” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India”

Since, the goods are not coming into India in such transaction, it is not considered as import of goods and therefore GST is not payable on reverse charge basis.

GST Registration – GST registration is not required even if turnover is more than specified limits.

GST on Reverse Charge

GST on Reverse charge means that service receiver has to pay GST rather then the service provider. If any services is purchased from outside India then it comes under reverse charge.

If reverse charge is applicable on any services you have taken, then you have to register in GST even if turnover is less than specified limits.

Person doing dropshipping business may be required to take services from outside India. The services of courier or freight forwarder are used to transport goods. And in many cases services of third party to inspect goods (goods inspection services) are used to assure the quality of goods.

Now the question arises whether such services are considered as import of services?

Section 2(11) of IGST act defines import of services as

Import of services means the supply of any service, where –

• the supplier of service is located outside India.
• the recipient of service is located in India.
• the place of supply of service is in India.

Therefore, a transaction which satisfies all the three conditions is considered as import of services.

Section 13(5) of 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 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 import of services. GST is not required to be paid on Reverse charge basis.

For the purpose of transportation services, the place of supply is considered as 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 import of service and GST not payable on reverse charge.

However, some services may fall under reverse charge and thus you may be required to register under GST.

FAQs

1. Are we required to report such sales (which is not considered as supply in GST) in GSTR-3B and GSTR-1.

Ans: No, we are not required to report such sales, which are not considered as supply, anywhere in GSTR-1 and GSTR-3B.

• Are we required to report such purchase of services which are not import of services?

Ans: GSTR-3B requires to report Non-GST supplies, Nil rated and exempt supplies. This is not considered as supply in the GST act, and therefore not required to be reported.

• Do we need to report such sales anywhere in any return?

Ans: Such sales are required to be reported in Table 5F of GSTR-9. Table 5F specifically states that “No Supplies” are to be included here. Also, GSTR-9 and GSTR-9C is related to matching actual returns filed with the financial statements. And such sales form part of the financial statement.

• Do we need to pay GST on reverse charge basis on any services taken from outside India which is not directly related to goods? For example: I have taken services of a website in US for selling of goods, for the goods which are transferred from China by me.

Ans: Yes, GST is to be paid on reverse charge basis by business in such case as this is not related to physical location of goods and thus place of supply will be considered in India and it becomes an import of service.

• I am paying tax under reverse charge basis on import of services and also for some domestic purchases. My sales are not liable for GST as it is not supply under GST. So, my input tax credit keeps on accumulating, Can I take refund of such input tax credit?

Ans: Input tax credit of such purchases are not allowed as these sales are not liable to tax under GST. And therefore question of refund of such amount does not arise.

• I am engaged in dropshipping business only in which I purchases from China and sells to USA. Whether I am required to take registration under GST?

Ans: No, you are not required to take registration as your turnover will be zero in such case. However, you will be required to get registered if you make any import of service as GST is required to be paid by a business on RCM basis.

• I rented a property outside India for warehousing goods for certain days. Will it change the nature of transaction?

Ans: No, it will not change the nature of transaction and still it will not be considered as a supply.

Notification no. 40/2017 – Central Tax (Rate) – Supply at 0.10% GST when goods are to be exported

When a registered person is supplying goods to another registered supplier for export then seller can levy only 0.10% GST rate. (0.05% CGST + 0.05% SGST or 0.10% IGST).

There are certain conditions to be fulfilled to take such benefit. The conditions are

1. The registered recipient shall export the said goods within a period of ninety days from the date of issue of a tax invoice by the registered supplier. (If such 90 days is expiring between 20^th March 2020 and 29^th June 2020 then such goods can be supplied up to 30^th June 2020).
2. The registered recipient has to indicate GSTIN of such supplier and tax invoice issued by such supplier in the shipping bill or bill of export.
3. The registered recipient shall be registered with an Export Promotion Council or a Commodity Board recognised by the Department of Commerce.
4. The registered recipient shall place an order on registered supplier for procuring goods at concessional rate and a copy of the same shall also be provided to the jurisdictional tax officer of the registered supplier.
5. The registered recipient shall move the said goods from place of registered supplier directly to the Port, Inland Container Deport, Airport or Land Customs Station from where the said goods are to be exported or directly to a registered warehouse from where the said goods shall be move to the Port, Inland Container Deport, Airport or Land Customs Station from where the said goods are to be exported.
6. When goods have been exported, the registered recipient shall provide copy of shipping bill or bill of export containing details of Goods and Services Tax Identification Number (GSTIN) and tax invoice of the registered supplier along with proof of export general manifest or export report having been filed to the registered supplier as well as jurisdictional tax officer of such supplier.

The registered supplier shall not be eligible for the above mentioned exemption if the registered recipient fails to export the said goods within a period of ninety days from the date of issue of tax invoice.

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