GST on Dropshipping Business Simplified

Introduction:

Dropshipping has come up us a new mechanism of international trade nowadays, which is gaining immense popularity amongst business communities due to low capital investments and higher profit margins. In this article, we will understand what the “Dropshipping” is and the legal intricacies and compliances associated to this business model.

What is Dropshipping?

Dropshipping is a e-business model in which the seller sells the products without maintaining any inventory with him. The seller owns an online portal or trading account with portals like e-bay, etsy, wish etc. where he displays for sale the products of third party (manufacturer or merchants). The seller simply accepts order from the customers and passes the orders to the third party. The third party packs and delivers the goods to the customer on behalf of the seller. Thus, the seller can procure goods from wholesalers/ manufacturers and that too in small quantity and earn high profits. The third party will raise invoice in the name of the seller (dropshipper) and the seller will raise invoice in the name of the customer.

What are the legal compliances to be made in dropshipping business?

Following are the legal compliances to be made in dropshipping business:

Formation of a business firm- Proprietorship/ Partnership/ Company
GST registration
Import Export Code (if foreign trade is involved)
Income Tax compliances

What are the documents required for GST registration for dropshipping business?

You will not be able to run your dropshipping business without obtaining a valid GST registration. Following documents are required for GST registration for dropshipping business:

PAN card of the applicant
Aadhar card of proprietor/ partners/ directors
Photograph of Authorised signatory or the owner
Valid address proof of business premises (Electricity bill)
In case of partnership or company: Partnership deed or Certificate of Incorporation

What are the different models of Dropshipping business?

Dropshipping business may be carried on in three different models:

Purchase and sale of goods within India
Purchase of goods in India and sale outside India
Purchase and sale of goods outside India without bringing goods into India

GST in case of purchase and sale within India

Suppose Ram (Jaipur) starts dropshipping business. He procures goods from Shyam (Kanpur). Ram takes order from Mohit (Gujarat) and on the basis of this order, Shyam supplies goods directly to Mohit in Gujarat. Shyam raises an invoice upon Ram and Ram raises a sale invoice in the name of Mohit. In this case, all the aspects of transaction are executed in India.

In this case, following will be the legal implication involved in the dropshipping transaction:

There will be no need of obtaining “Import Export Code”.
However, both the seller (Ram) and the Merchant (Shyam) will be required to get GST registration if their turnover exceeds threshold limit of Rs. 40 Lakhs.
In this case, since both Ram and Shyam are engaged in sales in the course of inter-state trade, therefore, GST registration will be compulsory irrespective of turnover threshold.
In this example, both transactions between (Ram-Shyam) & (Ram-Mohit) are inter-state transactions. So, IGST shall be paid at the applicable rates otherwise CGST-SGST shall be levied in case of intra-state transaction.
Further, Ram should have a valid PAN for obtaining GST registration if he decides to do dropshipping business in the name of proprietary firm. If he decides to form a partnership firm, he will have to execute a partnership deed and obtain PAN & GST registration of partnership firm.

GST on dropshipping business where goods are purchased in India and sold outside India

Sales of goods outside India is an “Export” transaction. Therefore, the dropshipper will be required to obtain Import Export Code before starting dropshipping business.
The dropshipper will be required to obtain GST registration compulsorily for doing dropshipping business outside India.
In this case, the merchant/ manufacturer who is supplying goods on behalf of the dropshipper will consider it as a normal sales and GST compliances will be made by him accordingly.
However, in the case of person engaged in dropshipping business outside India, the sale transaction will be treated as “Export” sale. He has two options:
(a) Apply for Letter of Undertaking (LUT) to GST department for sale of goods without IGST or
(b) Pay IGST at the time of sales and then claim refund afterwards.

What are the legal compliances where goods are purchased from outside India and sold outside India without bringing goods into India?

The transactions involved in this case is neither “import of goods” nor “export of goods”.
There are two aspects of this transaction:

(a) Purchase of goods by seller (dropshipper) from the merchant located outside India
(b) Sale of goods by the seller (dropshipper) to a customer located outside India

(a) Purchase of goods by seller from merchant located outside India:

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.”

In this case, the goods are not brought into India by the dropshipper. Therefore, the transaction of purchase by the seller (dropshipper) from the merchant located outside India cannot be treated as “Import of Goods”. Hence, GST is not payable under reverse charge mechanism. Also Refer https://www.taxwink.com/blog/gst-goods-purchased-and-sold-outside-india

(b) Sales of goods to a customer located outside India:

Schedule-III to CGST Act, 2017, specifies the “Activities or transactions which shall be treated neither as a supply of goods nor a supply of services.” Item No. 7 of Schedule-III reads as follows:

“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.”

Item No. 7 has been inserted by CGST Amendment Act, 2018 dated 30-08-2018 w.e.f. 01-02-2019 vide Notification No. 02/2019- Central Tax dated 29-01-2019.
In view of the above entry in Schedule-III, supplies of goods through a foreign merchant to a foreign customer without bringing goods into India shall not be treated as “Supply” under GST laws. As such, the provisions of GST laws are not applicable in any manner.

Important Points to consider:

It is still advised to the seller (dropshipper) to get GST registration and declare the dropshipping turnover as “non-GST supplies” in the GSTR-3B. This is because, the seller (dropshipper) might have to obtain services from various platforms like Google, Facebook or Youtube etc. either for web-hosting or marketing. If these services are in the nature of import of services, then GST shall be payable under “Reverse Charge Mechanism” on such services.
Further, the seller (dropshipper) will have to transact his business in foreign currency through international platforms like Paypal, Pingpong etc. who will ask for GST registration before registering “User Account” on these portals.
It is also advised to obtain “Import Export Code” as there will be involvement of foreign currency trade in this dropshipping model.

Disclaimer:

The views given in the article are the personal opinion of the author based on his knowledge and the prevalent laws in India. A different opinion may also prevail. The readers are requested to have professional guidance before proceeding any such transaction. For any query: Whatsapp or contact on 09660930417.

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