Are marketplaces liable for tax evasion or GST non-compliance by sellers?

Online marketplaces are increasingly central to the global economy, connecting millions of sellers with consumers. However, as e-commerce grows, issues related to tax compliance, including Goods and Services Tax (GST) non-compliance or tax evasion by sellers, have become more prominent. While the primary responsibility for paying taxes lies with individual sellers, online marketplaces are now under increasing scrutiny to ensure that their sellers comply with tax regulations. Failure by marketplaces to prevent tax evasion or ensure seller compliance could expose them to legal consequences, including penalties and reputational damage.

Key Points on Marketplace Liability for Seller Tax Evasion or GST Non-Compliance

Seller's Primary Responsibility for Tax Compliance

• Under India's Goods and Services Tax (GST) Act, individual sellers are responsible for their tax filings, including the correct reporting of sales and the payment of GST on their transactions. Sellers must register for GST if their turnover exceeds the threshold limit, and they are required to generate GST-compliant invoices for all transactions.
• Marketplace’s Role: Generally, the primary responsibility for GST compliance lies with the seller. Marketplaces act as intermediaries, facilitating transactions between the buyer and seller. However, the marketplace is required to provide certain support to ensure that transactions are correctly reported for tax purposes.

Marketplace's Role in Facilitating GST Compliance

• GST Collection on Transactions: Marketplaces may be required to collect GST on behalf of sellers for certain categories of products or services. For instance, under the GST Act, marketplaces in India are required to collect TCS (Tax Collected at Source), which mandates that marketplaces deduct a certain percentage of tax at the time of the transaction and remit it to the government.
• Supporting Documentation: Marketplaces must ensure that they maintain accurate records of the transactions, which can be audited by tax authorities. This includes maintaining records of seller GST registration numbers, invoice details, and other transaction-related documents.
• Ensuring Proper Invoicing: Marketplaces must ensure that the sellers issue GST-compliant invoices, which reflect the correct tax amounts. Many marketplaces enforce compliance by requiring sellers to provide GST details before listing products.

Marketplace Accountability for Non-Compliance

• While the marketplace itself is not responsible for the seller's direct tax filings, they can still be held liable for indirect involvement in tax evasion or non-compliance. This includes situations where:
• Failure to Collect TCS: If the marketplace fails to deduct the required TCS (Tax Collected at Source) or remit it to the government, it can be held liable for the non-payment of taxes.
• Facilitating Fake Invoices: If a marketplace knowingly allows or facilitates sellers to issue fake invoices or participate in fraudulent activities, it could be held liable under anti-tax evasion laws.
• Assisting in Tax Evasion: If the marketplace knowingly facilitates or enables sellers to evade taxes - such as by allowing the sale of goods without proper tax invoices or by falsifying records it could face severe penalties and legal action from tax authorities.

GST on Platform Fees

• In some cases, marketplaces themselves are required to charge GST on the platform fees they charge sellers. This fee is typically a percentage of the sale amount, and marketplaces must comply with the GST regulations on these transactions as well. Failure to do so could lead to penalties for non-compliance with tax laws.

Joint Liability for Tax Evasion

• If it is proven that the marketplace was complicit in facilitating tax evasion such as by knowingly allowing a seller to operate without GST registration or by turning a blind eye to fraudulent activities the marketplace could be held jointly liable for the unpaid taxes. Under Section 83 of the GST Act, tax authorities have the authority to take action against both the seller and the marketplace for non-compliance.
• Investigation and Penalties: Tax authorities may initiate investigations into both the marketplace and the seller if they suspect a pattern of tax evasion. This can lead to penalties, interest on unpaid taxes, and even criminal charges in cases of intentional fraud.
• Due Diligence: Marketplaces are expected to carry out due diligence to ensure that sellers on their platform are complying with tax laws. This includes checking the GST registration of sellers and ensuring that they issue proper invoices for transactions.

Regulatory Oversight and Increased Scrutiny

• In recent years, e-commerce platforms have come under increased scrutiny from tax authorities. The government has introduced several reforms, including the GST (E-commerce) Rules, which aim to bring more transparency and accountability to the digital marketplace. These reforms include:
• E-commerce Seller Monitoring: Marketplaces are now required to monitor and ensure that the sellers on their platform are compliant with GST regulations. Failure to do so could lead to penalties for both the marketplace and the seller.
• Tracking Seller Sales: Marketplaces may be required to provide tax authorities with access to their transaction data, including sales volumes and GST details, to ensure that sellers are properly reporting and paying taxes.

Consumer Protection and Marketplace Transparency

• Marketplaces must also ensure that consumers are not misled by sellers who fail to pay taxes or provide false information about products. In the event that a seller is found guilty of tax evasion, the marketplace could face reputational damage and consumer backlash for failing to ensure proper vetting of sellers.
• Product Pricing Transparency: Marketplaces must ensure that prices displayed for products are inclusive of all applicable taxes (GST, etc.) and that consumers are not being charged incorrectly due to tax non-compliance.
• Refunds and Returns: If a consumer purchases a product where GST has not been paid or the tax details are incorrect, they may face difficulties in obtaining a refund or claiming input tax credits, leading to consumer dissatisfaction. Marketplaces may be held accountable for not ensuring that products listed on their platforms are in compliance with tax laws.

Example

Suppose Amit buys a mobile phone from a seller on an online marketplace, TechStore, and the product is sold without proper GST invoicing. Later, the seller is found to have been evading taxes, and Amit learns that the GST for his purchase was never remitted to the government.

Steps Amit Could Take:

• File a Complaint: Amit can file a complaint with the GST authorities or the Consumer Protection Forum if he believes that the marketplace allowed a non-compliant seller to operate on the platform.
• Request a Refund: Amit can request a refund from TechStore if the product is found to be in violation of tax laws or if the marketplace fails to provide an invoice.

Steps TechStore Should Take:

• Verify Seller Compliance: TechStore should verify the seller’s GST registration and ensure that invoices are compliant with tax laws.
• Correct the Issue: TechStore should work with the seller to ensure that taxes are paid, and the correct invoices are issued to customers like Amit.
• Cooperate with Authorities: If necessary, TechStore should cooperate with tax authorities to resolve the issue and ensure compliance.