What is a Dropshipping Business?

Dropshipping is a retail business model where the seller markets and sells goods without actually holding inventory. Upon receiving an order from a customer, the seller forwards the order details to a third-party supplier (such as a manufacturer or wholesaler), who then ships the goods directly to the customer.

Example:
Consider Rohit, who owns a website selling ladies’ handbags. Rohit has a contract with a wholesaler, Prateek. When Mahesh places an order on Rohit’s website, Rohit collects the payment and issues the invoice to Mahesh. Rohit then forwards the order to Prateek, who ships the product directly to Mahesh. Prateek raises an invoice to Rohit, not Mahesh, and Rohit earns a margin on the transaction.

This model allows sellers to avoid upfront inventory costs and the risk of unsold stock, making dropshipping a low-risk, marketing-focused business.

Note: Marketplaces like Amazon and Flipkart are not considered dropshipping businesses. In marketplaces, the platform facilitates the transaction, but the actual invoice is issued by the listed seller. In dropshipping, the seller issues the invoice directly to the customer.

GST Implications on Dropshipping in Various Scenarios

1. Goods Purchased and Sold Within India

• Scenario: Rohit (seller) sells goods sourced from Prateek (wholesaler) to Mahesh (customer) within India.
• GST Treatment:
  • Prateek issues a tax invoice to Rohit.
  • Rohit claims Input Tax Credit (ITC) on the purchase.
  • Rohit issues a tax invoice and charges GST to Mahesh.
• GST Registration: Required if turnover exceeds ₹40/20/10 lakhs (based on type of state). Also required for inter-state supplies.

2. Goods Purchased in India and Sold Outside India (Exports)

• Scenario: Goods are purchased within India and sold outside India by a registered merchant.
• GST Treatment:
  • Merchant has two options:
    • Export under Letter of Undertaking (LUT) – no GST charged.
    • Pay IGST on export and claim refund.
  • Supplier (dropshipper) can opt for concessional GST rate of 0.1% (IGST) or 0.05% CGST + 0.05% SGST as per Notification No. 40/2017 – CT (Rate), subject to conditions.

• GST Registration: Required if turnover exceeds threshold or if reverse charge liability arises.

3. Goods Purchased from Outside India and Sold Within India

• Scenario: Goods are imported from China and sold to customers in India.
• GST Treatment:
  • Importer (merchant) pays IGST on import under reverse charge.
  • Merchant issues a tax invoice to Indian customer and charges GST (CGST/SGST or IGST).
  • Input Tax Credit of IGST paid on import can be claimed.
• GST Registration: Mandatory irrespective of turnover due to reverse charge applicability.

4. Goods Purchased Outside India and Sold Outside India (No Goods Entering India)

• Scenario: Indian business purchases goods from China and sells to customers in the US, without goods entering India.
• GST Treatment:
  • As per Schedule III of CGST Act (Para 7), this is neither a supply of goods nor services.
  • No GST applicable.
• GST Registration: Not required even if turnover exceeds threshold (unless import of services triggers RCM).

Reverse Charge Mechanism (RCM) in Dropshipping

Under GST, Reverse Charge is applicable when the recipient of goods/services is liable to pay GST instead of the supplier.

• Import of Services: If a dropshipper avails services from foreign entities (e.g., web hosting, digital marketing, inspection services), RCM may apply.
• Test for Import of Service:
  A service qualifies as an import if:

• Supplier is outside India.
• Recipient is in India.
• Place of supply is in India.

Place of Supply Clarifications:

• Inspection Services: As per Section 13(5) of IGST Act, if inspection is conducted outside India, the place of supply is outside India — hence, not an import of service.
• Transportation Services: If destination is outside India, then place of supply is also outside India — not an import.
• Digital Services (e.g., web tools, ad platforms): These are import of services – GST payable under RCM.
• Mandatory GST Registration: Even if turnover is below threshold, registration is compulsory if liable to pay GST under reverse charge.

Special Benefit: Notification No. 40/2017 – CT (Rate)

For domestic suppliers supplying goods to registered merchants for export, GST rate can be reduced to 0.1% IGST or 0.05% CGST + 0.05% SGST, subject to conditions:

1. Export to be made within 90 days of invoice.
2. Supplier’s invoice and GSTIN must appear in shipping bill.
3. Merchant must be registered with an Export Promotion Council or Commodity Board.
4. Movement must be from supplier to port/ICD/warehouse designated for export.
5. Merchant to provide proof of export and invoice copy to supplier and tax officer.
6. If export is not completed in 90 days, full GST becomes payable.

Conclusion

Dropshipping is an efficient and cost-effective model, but requires careful handling of GST implications based on transaction structure — whether goods are sourced domestically or internationally, and sold within or outside India. Compliance with GST laws is essential to avoid penalties and optimize tax benefits such as ITC or concessional tax rates.

For professional advice or GST compliance support in your dropshipping business, contact our team today.

Frequently Asked Questions