Flipkart allegedly rejigged its billing model by recasting marketplace fees collected from its vendors as transport charges to claim lower GST rates applicable to goods transport agencies by shifting revenue to a category meant for small road transporters.

The Directorate General of Goods and Services Tax Intelligence (DGGI) is currently conducting due diligence into complaints against Flipkart, officials said.

“We will send a show-cause notice for prosecution once we have accumulated full proof,” said a DGGI official. “We are obliged to take cognisance of every such complaint, as e-commerce platforms are not allowed to do this,” another official added. Both of them declined to be identified.

Flipkart did not reply to an email sent on 23 August.

The allegations surfaced after a Madras High Court advocate wrote to the Union finance minister about Flipkart’s billing practices. These were subsequently highlighted in a press statement issued on 23 August by the Federation of International Trade Investor Gunodaya Association.

Marketplace facilitation activities that involve connecting online buyers and sellers, charging commissions from vendors, providing listings, and enabling payments normally attract 18% GST, said experts.

“Transportation is merely ancillary and does not alter the nature of the principal supply since it does not represent the dominant element of the transaction,” said Ranjeet Mahtani, partner at Dhruva Advisors, a tax advisory firm.

“If the GST authorities conclude that the restructuring of fees as transportation charges was intentional, it may result in denial of the claimed exemption, recovery of the differential tax with interest, and imposition of penalties,” he added. 

“Recasting core marketplace commissions as transport charges is not a practice seen with other e-commerce players since their commissions continue to be taxed under the standard 18% GST bracket,” said a senior industry consultant who advises multiple e-commerce companies, requesting anonymity.

Cloud of doubt

Under GST rules, when services such as online marketplace access and delivery are bundled together taxes can apply in different ways.

In a composite supply, one service is the principal element and the whole bundle is taxed at that rate. In a mixed supply, where the services aren’t naturally tied together, the highest applicable GST rate applies.

A sudden shift in the principal supply from taxable to exempt would attract scrutiny from GST authorities, said Mahtani. “Such a re-characterization, if completely contrary to the practice and arrangement till date, will be under acloud of doubt,” he said.

Moreover, GST law may treat an ancillary supply as a composite supply and charge tax at the rate applicable to the main supply, added Kamal Aggarwal, senior advisor, Singhania and Co., a law firm.

“If an ecommerce platform shows a high charge for delivery (goods transport agency services) and very little or no charge for its marketplace services—even though the main business is actually facilitating sales—tax authorities may examine the actual nature of the bundle,” said Ankit Jain, partner, Ved Jain and Associates.

GST exemption for road transport is mainly meant to keep small-truck operators who move goods without issuing a consignment note outside the tax net. Once a consignment note is issued, it becomes a goods transport agency service and GST applies, explained Nilaya Varma, co-founder at Primus Partners, a management consulting firm based in Delhi.

“Calling platform commission or other marketplace fees ‘transport’ to claim exemption doesn’t work. Costs linked to getting the product to the customer (like freight up to delivery) are part of the product’s value and taxed with it,” said Varma.

E-commerce shipments in India are projected to grow at a 23-24% compound annual growth rate to 15-16 billion by 2029-30 from an estimated 4.8-5.5 billion in FY25 and 4.4 billion in FY24, according to a Redseer Research report published in March.