Bengaluru: India’s new goods and services tax (GST) regime is causing widespread headaches for small merchants and the e-commerce companies they work with.

The GST, which went into effect 1 July, has been touted as the biggest tax reform since the country’s independence seven decades ago, aimed at replacing hundreds of regional and federal levies with a standardized national tax. But retailers are discovering the new system is anything but simple. They’re battling a dizzying array of documentation requirements and product classifications, which affect the percentage of tax charged, that threaten to choke businesses with bureaucracy. Thousands of small merchants have been dropped from e-commerce sites because they can’t meet the new requirements.

Seller Archit Agarwal is still struggling to get the new rules straight after months of preparation. The owner of A2A Trading sells imported wireless headphones on Amazon.com Inc.’s local site, but he’s scrambling to figure out how his existing warehouse stock should be taxed, how customer returns should be handled and how detailed record-keeping should be. In August, he’ll start filing three sets of monthly tax returns.

“The new system is overwhelming," said the 32-year-old just days after the GST was put in place. The harried Agarwal was heading into a low-rise building in Bangalore to one of Amazon’s 16 pop-up GST Cafés. A sign outside advertises “Get GST compliant and sell online chinta-free," and dozens of sellers have come to offload their ‘chinta,’ or worries , before the online giant’s panel of taxation experts.

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The rate of GST varies depends on the product and service, ranging from zero to 28%, as well as numerous exemptions. For example, fresh milk doesn’t incur GST, cream attracts a 5% rate while butter and cheese are charged at 12%.

While merchants didn’t always comply with their tax obligations under the old regime, the consequences of not filing proper returns now are dire. Penalties range from fines of Rs10,000 ($155) to five years in jail. Those with large amounts of tax due will not be eligible for bail.

In the past weeks, e-commerce companies big and small have bounced thousands of non-compliant sellers off their websites. Some small businesses and restaurants have voluntarily dropped out because they can’t meet the new requirements.

Flipkart Online Services Pvt. Ltd, the country’s largest online retailer, said “close to 95%" of its 100,000 merchants are compliant, but the rest were removed before the GST kicked in. Rival Amazon said it would retain nearly all of its 200,000 merchants.

“Small e-commerce businesses are getting knocked out by GST," said Ravjeet Singh of the Delhi-based MS Trading Co., which sells men’s t-shirts on both sites. “The changeover is complicated and the penalties for not paying timely taxes are so harsh that people are scared."

Mumbai-based fashion e-commerce start-up Fynd said its sellers complained that the GST website had stopped taking registrations and was down, a sign of upcoming trouble. The site has dropped almost 10% of its 330 sellers.

“Merchants are seeking clarity on a number of vexing questions," said Harsh Shah, the company’s co-founder. “They are also are not quite sure what happens in various scenarios like discounts or in bundled offers."

Nevertheless, the e-commerce industry largely views the overhaul as paving the way for long-term growth. Businesses are no longer required to go to multiple agencies in different regions or pass through entry points in each region, where miles-long truck lines were common.

Companies like Flipkart and Amazon, which source products and locate warehouses at multiple locations for tax purposes, will be able to reduce costs as transportation expenses fall and deliveries arrive faster. “Online retail will be a lot more streamlined," said Vivek Somareddy, an Amazon executive who has worked with merchants to prepare for the new tax.

The pain will last through the next few quarters, said Sampad Swain, co-founder and chief executive officer of Instamojo, an e-commerce platform that helps small businesses sell online. Only about half the 250,000 businesses that sell mangoes, umbrellas and cupcakes on his site are registered with the new tax website. But Swain expects the number of businesses on his platform to swell to one million in the next 18 months.

“Small businesses will find the going a lot easier under the new tax regime and this will become clearer as months go by," he said. Bloomberg

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