In a recent development that has sent ripples across India’s e-commerce sector, the Directorate General of Goods and Services Tax Intelligence (DGGI) has initiated a preliminary probe into Flipkart. The investigation stems from allegations that the Walmart-owned online marketplace is engaging in aggressive tax planning by reclassifying its billing structure to reduce its GST liability. This case highlights a critical and complex area of indirect taxation, serving as a crucial lesson for businesses on the nuances of tax compliance under the CGST Act.

The Allegations and the Tax Challenge

The core of the issue lies in Flipkart’s alleged practice of re-categorizing its “marketplace facilitation fees” – the commissions it charges sellers for using its platform as “transportation charges.” Marketplace facilitation, which includes services such as connecting buyers and sellers and providing a digital storefront, is typically taxed at an 18% GST rate. However, certain Goods Transport Agency (GTA) services are either exempt or subject to a lower GST rate of 5% or 12%. By altering the billing structure, Flipkart is accused of taking advantage of these lower rates, thereby reducing its overall tax burden.

This strategy is being challenged by tax authorities who contend that the primary and dominant service provided by Flipkart is that of an online marketplace, not a goods transport agency. Transportation is merely an ancillary service required to complete the transaction. The authorities’ stance is that the taxability of a composite transaction should be determined by its principal supply, not by its subordinate elements.

The CGST Act and Legal Framework

To understand the legal standing of the probe, one must refer to the Central Goods and Services Tax (CGST) Act, 2017. The key concepts at play here are “composite supply” and “mixed supply.”

• Composite Supply: Section 2(30) of the CGST Act defines a composite supply as a supply consisting of two or more taxable supplies of goods or services, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business. In a composite supply, the entire transaction is taxed at the rate applicable to the principal supply. In this case, tax experts argue that the principal supply is the online marketplace service, which attracts 18% GST, making the transportation an incidental part of the service.
• Mixed Supply: Section 2(74) defines a mixed supply as a combination of two or more individual supplies of goods or services made together for a single price, where they are not naturally bundled. A mixed supply is taxed at the highest rate applicable to any of its individual components.

While Flipkart’s billing change attempts to re-engineer this, the law scrutinizes the “dominant element” of a transaction. Suppose the main business is facilitating sales, and transportation is merely to deliver the product to the customer. In that case, tax authorities will likely classify it as a composite supply, regardless of the invoice’s structure.

The provisions for a Goods Transport Agency (GTA) are distinct. A GTA is a person who provides service in relation to the transport of goods by road and issues a consignment note. They have the option to pay GST at 5% (without Input Tax Credit) or 12% (with Input Tax Credit). The liability to pay tax on these services often falls on the recipient under the Reverse Charge Mechanism (RCM). The probe against Flipkart is not about the general taxability of GTA services, but rather the alleged misuse of these provisions by a large corporation.

What Businesses Need to Keep in Mind for GST Compliance

This case serves as a crucial reminder for all businesses, especially those in the e-commerce and logistics sectors.

1. Correct Classification of Services: Always ensure your business services are correctly classified as per the GST law. Do not misrepresent the nature of your primary business activity to claim lower tax rates. The dominant nature of the supply should dictate the GST rate.
2. Scrutiny of Bundled Services: If you offer bundled services (e.g., product, delivery, installation), be meticulous in identifying whether they constitute a composite or mixed supply and tax them accordingly.
3. Audits and Investigations: Tax authorities are increasingly vigilant and are using data analytics to identify potential mismatches and anomalies in tax filings. Businesses must be prepared for a higher level of scrutiny and should maintain robust documentation to support their tax positions.
4. Avoid Aggressive Tax Planning: While tax optimization is a legitimate business goal, aggressive strategies that seem to contravene the spirit of the law can lead to lengthy and costly legal battles, interest, and penalties.

Conclusion

The DGGI probe into Flipkart’s billing practices is more than just a case of alleged tax evasion; it’s a test of the legal principles governing composite supply in the e-commerce era. The outcome of this investigation will likely set a significant precedent for how online marketplaces structure their fees and ensure compliance with India’s GST framework. It underscores the importance for all businesses to prioritize transparent and legally sound tax practices to avoid a future fraught with legal challenges.