Can marketplaces face liability for not following new e-invoicing rules?

With the growth of e-commerce, governments worldwide have implemented e-invoicing regulations to streamline taxation, enhance transparency, and reduce tax evasion. For online marketplaces, compliance with e-invoicing laws is essential, as they must ensure that sellers are generating valid electronic invoices for all taxable transactions. If a marketplace fails to ensure that e-invoices are correctly issued by sellers, it could face significant legal liability under tax laws. Marketplaces must monitor compliance not only within their own operations but also from third-party sellers on their platform.

Key Points on Marketplace Liability for E-Invoicing Non-Compliance

Understanding E-Invoicing Regulations

E-invoicing involves the generation and exchange of invoices in an electronic format. Governments have introduced e-invoicing rules primarily to ensure that all taxable goods and services transactions are recorded properly for tax purposes, reducing fraud and improving tax collection. Some of the common features of these regulations include:

• GST Compliance (India-specific): In India, the Goods and Services Tax (GST) regime requires businesses with a certain turnover to comply with e-invoicing regulations. Businesses must generate e-invoices that are authenticated through the GSTN (Goods and Services Tax Network).
• Unique Invoice Number: The invoices need to carry a unique IRN (Invoice Reference Number), which is generated by the government’s system. These invoices must be uploaded to the GSTN portal.
• Seller and Marketplace Accountability: While the seller is responsible for generating the e-invoice, the marketplace must ensure that its sellers comply with this regulation, particularly when the marketplace facilitates the sale and acts as a conduit for payments.

Legal Responsibilities of Marketplaces

Marketplaces generally act as facilitators for transactions between buyers and sellers, but they may also assume certain legal responsibilities under local tax laws, especially in the context of e-invoicing:

• Duty to Ensure Seller Compliance: Even though the seller is directly responsible for generating the e-invoice, the marketplace may be held accountable for failing to ensure compliance. Marketplaces are required to monitor that their third-party vendors (sellers) follow tax compliance protocols.
• Marketplace as a Facilitator: In many jurisdictions, marketplaces may be held liable if they enable non-compliant transactions. This includes transactions where e-invoices are not issued or if sellers engage in tax evasion.
• Penalties for Non-Compliance: If a marketplace does not take appropriate measures to ensure that e-invoicing is properly executed, it can face penalties or fines. Regulatory authorities may view the marketplace as responsible for allowing non-compliant practices.

Marketplace Liabilities for Seller Non-Compliance

While marketplaces are not directly responsible for generating e-invoices, they may be held liable under specific circumstances:

• Role in Facilitating Transactions: If the marketplace facilitates a transaction and the seller fails to generate the required e-invoice, the marketplace may be penalized for not ensuring compliance. Some marketplaces act as payment intermediaries and issue receipts on behalf of sellers, which can create more direct responsibility for invoicing.
• Aggregated Liability: In certain cases, if a marketplace repeatedly hosts non-compliant sellers, regulators may aggregate the liability and hold the platform responsible for the overall tax compliance of its sellers.
• Access to Seller Data: Marketplaces typically have access to detailed sales data and transaction histories. This gives them the ability to monitor whether sellers are generating e-invoices and ensuring that tax requirements are met. A failure to use this access to ensure compliance can lead to liability.

Risks of Non-Compliance for Marketplaces

Marketplaces that fail to ensure proper e-invoicing practices can face several risks:

• Financial Penalties: Regulatory authorities may impose fines or penalties on the marketplace for non-compliance. This can include fines for enabling tax evasion or failing to verify e-invoicing among sellers.
• Loss of Reputation: A marketplace’s reputation may suffer if consumers or tax authorities discover that it is not enforcing e-invoicing laws. This could result in reduced customer trust and a decline in business.
• Tax Audits: Non-compliance could lead to tax audits for the marketplace, especially if it is found to be indirectly facilitating illegal transactions or enabling unreported sales through its platform.
• Delayed Transactions and Refunds: Incorrect invoicing can lead to complications with refunds or returns, especially if tax documentation is needed to complete a refund process. Non-compliance with e-invoicing rules may delay such processes, further frustrating consumers.

Regulatory Action Against Non-Compliant Marketplaces

Governments and tax authorities have the power to investigate and penalize marketplaces that fail to enforce e-invoicing compliance. This could involve:

• Increased Scrutiny: Tax authorities may subject non-compliant marketplaces to closer scrutiny, including investigation into their tax practices and seller operations.
• Blocking Non-Compliant Sellers: Marketplaces that do not ensure e-invoicing compliance among their sellers could be ordered to block non-compliant sellers or risk facing regulatory action themselves.
• Reputation Impact: Governments can issue public notices warning consumers about non-compliant platforms, leading to a decline in consumer confidence and sales.

Steps Marketplaces Can Take to Ensure E-Invoicing Compliance

To mitigate liability, online marketplaces can take the following steps:

• Set Clear Compliance Guidelines: Clearly communicate e-invoicing requirements to sellers when they sign up or list products on the platform. Terms of service should explicitly state the obligation for generating proper e-invoices for taxable transactions.
• Use Technology for Monitoring: Employ automated systems to monitor transactions and ensure that sellers are generating e-invoices for every transaction. The platform should flag transactions that lack an IRN or that do not match GST guidelines.
• Provide Compliance Training: Offer training sessions or resources to help sellers understand and comply with the e-invoicing regulations.
• Audit Seller Accounts: Perform regular audits of seller accounts to ensure e-invoicing compliance. This can include randomly checking invoices generated by sellers and ensuring they are being uploaded to the GST portal or corresponding systems.
• Work with Tax Authorities: Maintain open communication with local tax authorities to stay updated on any changes to e-invoicing rules. Proactive compliance will reduce the risk of penalties.

Example

Vikram, a seller on an online marketplace TradePro, sells electronics. He makes a sale of a smartphone, but he fails to generate an e-invoice for the transaction, violating the local GST e-invoicing rules.

Steps Vikram Could Take:

• Correct the Invoice: Vikram should immediately generate the required e-invoice for the transaction and upload it to the relevant portal (such as GSTN in India).
• Notify the Marketplace: Vikram should inform TradePro of the issue, ensuring that the platform is aware of the error.

Steps TradePro Should Take:

• Investigate Seller’s Compliance: TradePro should verify whether Vikram is regularly generating e-invoices for all transactions.
• Implement Corrective Measures: If Vikram is a repeat offender, TradePro should consider suspending his account until compliance is ensured. Additionally, the marketplace should communicate to all sellers the importance of adhering to e-invoicing laws.
• Penalty: If TradePro is found to have facilitated non-compliance, the platform itself may be penalized for failing to ensure seller compliance.