GST on DropShipping Business: At a rapid pace, the business of dropshipping is increasing. In such a business, there is no investment and no risk of dead stock, as the person doesn’t purchase the goods in advance. Instead, the person can focus on just marketing and selling.
Note that e-commerce giant like Flipkart, Amazon is not doing dropshipping business. They are considered marketplaces. Flipkart and Amazon on their sites do not issue invoices to purchasers; instead, the seller issues the invoices. While in dropshipping business, the individual directly issues the invoices.
- What Is A Business of Dropshipping?
- GST On Dropshipping Business When Goods Are Sold Outside India
- GST On Dropshipping On Goods That Are Purchased Outside India And Also Sold Outside India
- Applicability Of GST On Dropshipping ON Goods That Are Sold And Purchased Within India
- Applicability Of GST On Dropshipping ON Goods That Are Sold And Purchased Outside India
- Services used in such transaction
- Notification no. 40/2017 – Central Tax (Rate) – Supply at) 0.10% GST when goods are to be exported
- Frequently Asked Question
Dropshipping is a kind of business where the seller sells the goods which they do not own at the time of selling it but then, after receiving the order, transfers the order to a third party. Then the third party delivers the order to the purchaser.
For example, an individual has a website where the person sells school bags. The person has entered into a contract with the wholesalers of a variety of school bags. The individual takes orders on its website and then transfers such orders to the wholesaler. Such a wholesaler via courier sends goods to the purchaser. The person pays the price of the product agreed upon by the wholesaler and also the courier charges. The margin-left in between is earned by the person.
In a normal manner, the drop shipper has to charge GST when goods are sold outside India from the person in dropshipping Business (merchant). For such merchant, it will be an export sales, and he has the option to either sells without GST and file a Letter of Undertaking (LUT), or he can pay IGST at the time of sale and then afterward apply for a refund.
While the drop-shipper is invoicing to the merchant, he can benefit from Notification no. 40/2017 – Central Tax (Rate) and pay CGST and SGST at a rate of 0.05% each or 0.1% IGST, as applicable. This benefit is subject to certain conditions as given in the notification. (more on this later)
In such circumstances, it is neither the import of goods nor the export of goods.
Schedule III of the CGST Act states the activities or transactions which shall be treated neither as a supply of goods nor a supply of services.
Para 7, which 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”, got added to this schedule in the CGST amendment act 2018. Therefore, if an Indian business does its business in which goods are sold outside India and are purchased outside India, such transaction is not considered a supply. And therefore, a tax of GST doesn’t occur.
According to Section 2(10) of the IGST Act, with its grammatical variations and cognate expressions, defines import of goods as
“import of goods” basically means bringing goods into India from a place outside India.
Since in such a transaction where the goods are not coming into India, it is not considered as import of goods, and therefore on a reverse charge basis, GST is not payable.
A person Sam is doing dropshipping business, he enters into a contract with Rony that when the order arrives to procure goods. Now Sam gets an order from Rohan. Sam will take payment from Rohan and issue an invoice to him. Sam will send the order to Rony, which in turn sends goods to Rohan but didn’t issue an invoice in his own name. He is just sending goods to Rohan on behalf of Sam.
Rony will issue an invoice to Sam because he had sold goods to Sam and not Rohan. Sam can take an input tax credit of such invoice.
Both Rony and Sam are required to take registration if the turnover is more than the specified limit of Rs. 10/20 lakhs. Also, if sales are made in or outside the union/state territory in which the seller has a place of business, then registration is needed.
The merchant has to pay IGST if the drop-shipper is outside India on a reverse charge basis at the time of import of goods. The merchant will issue a standard GST invoice with IGST or SGST/CGST as applicable.
The merchant at the time of import of goods will receive the input tax credit of such paid IGST.
In such a transaction, a merchant may use many services. The services of the courier or freight forwarder are used to transport goods. And in many circumstances, to inspect goods (goods inspection services), the services of a third party are used to assure the quality of goods.
Now the question arises whether such services are considered as import of services?
According to the definition of Section 2(11) of the IGST Act, the import of services as:
Import of services means the supply of any service, where––
- the supplier of service is settled outside India.
- the recipient of the service is settled in India.
- the supply place of service is in India.
Therefore, a transaction is considered as an import of services when all three conditions satisfy.
Section 13(5) of the IGST act states that when “services supplied in regard of goods which are obliged to be made physically available by the receiver of services to the supplier of services”, then the site of supply will be the place where services are actually performed.
Therefore, in the matter of goods inspection services, the site of supply will be the point where such inspection is made. And thus, all three conditions are not fulfilled and not entertained as import of services. GST is not needed to be paid on the basis of reverse charge.
The place of supply is considered as a location for the purpose of transportation services, where the goods are reserved to be reached. In this situation, goods are also transferred to a place outside India. Therefore such service will not be acknowledged as import of service, and GST not obligatory on reverse charge.
When a registered person is supplying goods to another registered supplier for export, then the seller can levy only a GST rate of 0.10%. (0.05% CGST + 0.05% SGST which combines 0.10% IGST).
There are set conditions that are required to fulfill to take such benefit. The conditions are:
- Within a period of ninety days, the registered recipient shall export the said goods from the date of issue of a tax invoice by the registered supplier. (If such expiring is between 20th March 2020 and 29th June 2020 of a duration of 90 days, then such goods can be supplied up to 30th June 2020).
- The registered recipient has to indicate the GSTIN of such supplier and the tax invoice issued by such supplier in the shipping bill or bill of export.
- The registered recipient with an Export Promotion Commodity shall be registered themself, or Council or Board which is recognised by the Department of Commerce of India.
- The registered recipient must place an order on the registered supplier for procuring goods at a concessional rate, and a copy of the same receipt of the registered supplier shall also be mentioned to the jurisdictional tax officer.
- The registered recipient must move the said goods from the place of the registered supplier directly to the Port, Airport or Land Customs Station, Inland Container Deport from where the said goods are to be exported or directly to a registered warehouse from where the said goods shall be a move to the Port, Inland Container Deport, Land and Airport Customs Station from where the supposed goods are to be exported.
- The registered recipient must provide a copy of the shipping bill or bill of export containing details of Goods and Services Tax Identification Number (GSTIN) when goods have been exported, and tax invoice of the registered supplier accompanying with proof of export report or export general manifest having been filed to the registered supplier and officer of jurisdictional tax of such supplier.
- Suppose the registered recipient collapses to export the ordered goods within a period of ninety days from the date of issue of the tax invoice. In that case, the registered supplier shall not be eligible for the exemption as mentioned earlier.
What is a dropshipping business?
Dropshipping is a business in which the seller sells the goods which he does not own at the time of selling goods but, after receiving the order, then the order gets passed to a third party. Then the third party then delivers the order to the purchaser.
Is GSTIN required by a person who dropships from China to the US?
Answer: No, if a person’s only business is to dropship from China to the US, then that person does not require to register.
Are we needed to report such sales (which is not regarded as supply in GST) in GSTR-1 and GSTR-3B?
No, we are not obligated to report such sales, which are not regarded as supply, anywhere in GSTR-1 and GSTR-3B.
Do we need to report the purchases of services that do not import services?
GSTR-3B requires to report Non-GST supplies, exempt supplies and Nil rated. This is not acknowledged as supply in the GST act, and therefore not obligated to be reported.
I am employed in dropshipping business only, in which I purchase goods from China and sells them to the USA. Do I am required to register under GST?
No, your turnover will be zero in such a case, so you are not required to take registration. However, you will be compelled to get registered if you deliver any import of service as GST is ordered to be paid by a business on an RCM basis.
For warehousing goods for specific days, I rented a property outside India. Will the nature of the transaction be change?
No, the nature of the transaction will not change, and still, it will not be acknowledged as a supply.
For Dropshipping in India, does one need GST?
GST registration is compulsory; if one is selling your products through an eCommerce portal. Thus, Rs. 40 lakh is the threshold Turnover limit for GST Registration for a supplier of Goods.
Are such sales are needed to be reported anywhere in any return?
Such sales are ordered to be reported in Table 5F of GSTR-9. Table 5F specifically declares that “No Supplies” are to be included here. Also, GSTR-9C and GSTR-9 are associated with matching actual returns filed with the financial statements. And the financial statement of such sales forms part.
Do we need to pay GST on any services taken from outside India which is not directly related to goods on a reverse charge basis? For example, when a service is taken from a website in China for selling of goods, for the goods which are transferred from the US by me.
Yes, GST is to be paid by a business in such case on a reverse charge basis as this is not related to the physical location of goods, and thus the place of supply will be acknowledged in India, and it converts an import of service.
Sara is paying tax under reverse charge for domestic purchases or based on the import of services. The sales of Sara are not liable for GST as it is not outfitted under GST. So, my input tax credit keeps on accumulating. Can Sara take a refund of such input tax credit?
No, a refund of the amount cannot be taken, which underlies in the electronic credit ledger. The amount claimed as an input tax credit will be in the credit ledger of Sara, and thus its refund cannot be taken.