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Ecommerce Accounting: Why is it different

Versha Kamwal
January 11, 2021
7
mins read

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The Indian ecommerce industry is on a growth trajectory, growing at a CAGR (Compounded Annual Growth Rate) of 51%, the highest in the world. Businesses of all sizes are coming together to be an integral part of it. But when it comes to tracking finances, it can be a bit tricky for established companies and new entrants, alike.

Accounting goes beyond bookkeeping, it needs financial intelligence. Tracking your invoices, payments, commissions, and more isn’t enough. Firstly, you need to let go of the assumption that ecommerce accounting is just like any traditional accounting.

As accounting varies from industry to industry, you need to understand the unique aspects of your industry to get accurate numbers for informed decision-making. Accounting uncovers the hidden truths of profitability and cash flow. Inaccurate or poor accounting will only lead to business mediocrity or even failure.

In ecommerce, the basic principles of accounting remain the same with some fundamental differences. The challenge is to understand the salient features of ecommerce and how they impact ecommerce accounting.

The unique aspects of ecommerce accounting

1. Rules of taxation

When you sell online in India, Goods and Services Tax (GST) is applicable. GST is a destination-based tax dependent on the place of supply, i.e. where the goods are delivered.

Under GST, there are multiple taxes:

  • CGST (Central Goods & Services Tax), collected by the central government for intra-state supply (within a state)
  • SGST (State Goods & Services Tax), collected by the state government for intra-state supply (within a state)
  • IGST (Integrated Goods & Services Tax), collected by the central government for inter-state supply (between two states)
  • UGST (Union Territory Goods & Services Tax), collected by the Union Territory's government for a supply within a Union Territory

In brick-and-mortar stores, the customer and the seller have the same location—the place of supply remains fixed. Thus, the seller has to follow the same taxation rules in every transaction.

On the other hand, in ecommerce, you are registered at a certain location, but you have buyers across the country—your place of supply is variable. It means your tax obligations change with every transaction. Wherein, CGST and SGST are collected for intra-state transactions (within a state) and IGST is collected for inter-state transactions (between two states). Incorrect determination of place of supply can result in tax collection by the wrong government, either state or centre.

Place of supply and tax levied

Additional taxation rules while selling on ecommerce marketplaces:

Tax deducted at source (TDS) applicability on ecommerce sales

When an ecommerce merchant or dealer is registered in India (i.e. has a valid PAN or Aadhar number), the ecommerce operator is liable to deduct 1% TDS. If the ecommerce merchant is not registered in India, the ecommerce operator is liable to deduct 5% TDS. The calculation of TDS is done on the gross value of goods (excluding GST) supplied through the ecommerce operators.

For example, an ecommerce merchant has total sales of INR 8,00,000 through Amazon (exclusive of 18% GST). Amazon India would now deduct TDS at 1% on gross sales, i.e INR 8,000 which needs to be deposited to the government.

Tax collected at source (TCS) applicability on ecommerce sales

All ecommerce aggregators are made responsible under the GST provision for deducting and depositing tax at the rate of 1% from each transaction. Any ecommerce merchant or dealer selling goods would get their payment after this deduction of 1% tax.

Note: All ecommerce merchants or dealers need to register themselves under the GST act even if their turnover is less than 20 Lakhs for claiming the tax deducted by the ecommerce aggregators.

The calculation of TCS is done on the net value of goods or services supplied through the ecommerce aggregator.

For example, an ecommerce merchant sells products worth INR 20,000 through Amazon:

The total value of products with GST at 18% = INR 23,600. This amount is then collected by Amazon and transferred to the seller after a deduction of 1% TCS. Therefore, net amount transferred to the ecommerce merchant = 23,600 - 236 = INR 23,364. The TCS remitted by the ecommerce operator (i.e. INR 236) will be provided as GST credit to the ecommerce merchant.

Overall, under the GST regime, ecommerce operators are liable to collect both TCS and TDS from ecommerce merchants. TCS is collected against the payment made to the ecommerce merchants by the marketplace for the goods supplied. Whereas, TDS is collected against the gross sales of the ecommerce merchant at the specified rate.

2. Flow of payments

Payment collection in traditional stores is direct. A seller or a cashier collects payments from customers directly via cash or digital payments for their purchases. Whereas, when ecommerce businesses sell on their online store, the payment gateways collect payments from customers, deduct their fees, and then make payments to the businesses.

Ecommerce merchants sell products on multiple marketplaces such as Amazon, Myntra, Flipkart — each having their own flow of payments. Payment collection from customers for their purchases are done via online payments or cash-on-delivery. These online marketplaces have their own remittance cycle for payments and pay accordingly.

For instance, most marketplaces remit payments after order delivery. Orders are received chronologically, but deliveries may not follow the same order. Therefore, payments don't necessarily follow the chronology of orders, i.e. you may receive the payment for order #2 before order #1.

Orders and payments chronology

Remittance cycle refers to the schedule of any type of payment including invoices or other obligations by an online marketplace to the seller.

3. Finding transactions

In traditional businesses, your payments are your sales, whether received via cash or digital payments. However, in ecommerce, there is a different mechanism to find your payments.

As an ecommerce merchant, you cannot assume that the deposits in your bank account are solely your payments for sales. They are affected by various deductions like tax, returns, shipping fees, seller fees, and much more. Moreover, they are not for a specific date but a specific duration of time.

For example, Amazon makes a deposit in your bank account on the 6th of July; many of the transactions for that deposit would have occurred in June. The accurate timing of these transactions (sales, expenses, liabilities) impacts your business a lot. To understand each deposit, you need to go back to the seller’s panel of your marketplaces to find this information. Without it, you can under or over-estimate your financial position severely.

4. Inventory tracking

In a brick-and-mortar store, the stock is available in the store itself. It becomes easy to track inventory. Whereas, in ecommerce, tracking and verifying inventory is different as the stock is sold through multiple channels.

Here, you have to keep track of inventory at different stages—at the warehouse, in transit, or in a returns pile. Adding to the complication, you might also use a Third-Pary Logistics (3PL) or Fulfilment By Amazon (FBA) to store and ship your products on your behalf. Moreover, when you increase your products' range and explore more sales channels, it becomes even more challenging to accurately track your inventory.

5. Fee structures

Traditional businesses sell products from their store directly to customers and do not involve a complex fee structure for such transactions. But in ecommerce, there is an exhaustive list of marketplaces to sell your products. These marketplaces have their own unique fee structures.

For instance, Amazon charges the following fees:

  • Referral fee: Charged for each item sold on Amazon and varies from category to category.
  • Closing fee: Charged for each item sold and varies based on the price range of the product.
  • Shipping fee: Charged for each item shipped and varies based on the weight and dimensions of the products.

Amazon fee structure
Amazon fee structure

The seller and the marketplace agree on a commercial fee structure based on which they deduct various fees before paying their sellers for sales. These fees also vary from product to product. It becomes a herculean task to track various fees applied by the marketplace and reconciling them against the agreed fee structure.

Even if you sell on your website and use a payment gateway, the fee varies on the different modes of payments—debit card, credit card, Unified Payments Interface (UPI) and more. All these modes have a different percentage fee that they charge ecommerce merchants when a purchase is made. Moreover, these charges vary from bank to bank as well —making it difficult to track and reconcile these payments.

6. Volume of transactions

When compared to an online business, the volume of business transactions in brick-and-mortar stores is less as transactions are recorded at a macro level. Whereas, the recording of transactions is done at a micro-level for ecommerce accounting.

For example, in a traditional store, if you sell your products to a reseller in wholesale, you can bill that transaction once. Whereas, in ecommerce, when you sell at a marketplace, you have to invoice and bill every customer individually. It means that you have to record, store, and analyse such a large volume of data to gain complete financial visibility.

7. Different operating models

Besides different fee structures, ecommerce marketplaces work on different operational models — B2B (business-to-business), B2C (business-to-customer), and B2B2C (business-to-business-to-customer).

How does the B2B model work?

  1. The marketplace collects orders from their customers.
  2. The marketplace then raises a purchase order to the ecommerce merchant against these orders.
  3. The ecommerce merchant fulfills the purchase order and raises an invoice to the marketplace.
  4. The marketplace makes the payments to the ecommerce merchant against the invoice.

How does the B2C model work?

  1. The marketplace collects orders from the customer and provides the order information to the ecommerce merchant.
  2. The ecommerce merchant fulfill the order and invoices to the customer.
  3. The marketplace makes the payment to the ecommerce merchant after deducting their fees.

How does the B2B2C model work?

The B2B2C model is similar to the B2B model, except the ecommerce merchant invoices the customer on behalf of the marketplace.

  1. The marketplace collects orders from their customers.
  2. The marketplace raises a purchase order to the ecommerce merchant.
  3. The ecommerce merchant raises an invoice to the marketplace against the purchase order.
  4. The marketplace makes the payments to the ecommerce merchant against the invoice.
  5. The ecommerce merchant raises an invoice to the customers on behalf of the marketplace and fulfils the purchase order.

Bottom line

The unique fundamentals of ecommerce make ecommerce accounting eccentric. Understanding these nuances is important to plan your ecommerce bookkeeping process. Accurate bookkeeping ensures that you get correct financial figures that lead to informed decision making. Poor accounting will lead to business mediocrity or even failure, as accounting uncovers the secrets of profitability and cash flow.

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