Dropshipping in India and GST

Yes, dropshipping is legal in India, and GST treats you as the seller when the customer buys from you and you buy from a supplier. Selling to other States, or through a marketplace, needs GST registration from your first sale. Your supplier bills you, ships to your customer, and you charge GST on your own sale.

What is dropshipping, in GST terms?

You list a product, the customer pays you, you order it from a supplier, and the supplier ships it straight to the customer. You never hold stock. GST has no special rule for this. It asks a simpler question: who sold what to whom?

In the usual set-up the answer is clear. The customer's invoice is in your name and you set the price, so you are the seller. The supplier's invoice is in your name too, so you are also a buyer. You pay GST on your sale and take credit for the GST on your purchase.

There is a second model. If the supplier invoices the customer directly and you only earn a cut, you have not sold any goods. Your income is a fee for a service, and that is taxed as a service. Your contract and the names on the invoices decide which model you are in. If they point both ways, settle it with a CA before you launch.

Do you need GST registration?

What about the Rs 40 lakh limit? That limit, set by Notification 10/2019-Central Tax for sellers of goods in most States, does not help most dropshippers. Its first exception is anyone who must register under section 24, and section 24 covers inter-State sellers and marketplace sellers.

The enrolment route has strict conditions, such as no inter-State sales at all. They are set out in selling on Meesho without GST. For the general limits by State, see the GST registration limit.

Who charges what: the bill to ship to rule

Here is the part that trips people up. The supplier sends goods to your customer because you told it to. Section 10(1)(b) of the IGST Act covers exactly this. The place of supply on the supplier's sale to you is your principal place of business, not the customer's address.

Your own sale to the customer follows the normal rule in section 10(1)(a): the place where the delivery ends. So the supplier's bill is tied to your State, and your bill is tied to the customer's State.

Why does this matter so much? Because of input tax credit, the GST on purchases that you set off against the GST on your sales. The GST portal's GSTR-2B FAQ says credit is not available where the supplier and the place of supply are in the same State and you are in another. A supplier who writes the customer's State on your bill can quietly cost you the whole credit.

A worked example

You are registered in Delhi. Your supplier is in Pune. A customer in Mumbai orders a lamp. Say the lamp carries 18% GST.

You owe Rs 180 on the sale, take Rs 108 as credit, and pay Rs 72 in cash. Your margin before other costs is Rs 400.

Now the wrong bill. The supplier writes Maharashtra as the place of supply and charges CGST Rs 54 plus SGST Rs 54. That credit is not available to you in Delhi. You pay the full Rs 180 in cash and lose Rs 108 an order. At 200 orders a month, that is Rs 21,600 a month gone.

How to set up, step by step

1. Decide your model. Seller or agent. Put it in writing with the supplier.
2. Register for GST. Your principal place of business is where you actually run things, and a home works. See selling online from home.
3. Agree the invoicing. Every supplier bill should carry your name, your GSTIN and your State as the place of supply, with the customer's address as the ship-to address.
4. Issue your own invoice to each customer, from your own numbered series.
5. Check GSTR-2B every month. The supplier's bills must show there before you claim the credit.
6. File GSTR-1 and GSTR-3B on time, even in a month with no orders.

On a marketplace there is one more check. Amazon and Flipkart collect parcels from a pickup address on your account. Before you give them a supplier's warehouse, read the seller policy on pickup addresses and ask a CA whether that address should be added to your registration.

Selling abroad from a foreign supplier

Some Indian dropshippers sell to buyers in the US or UK from a supplier in China, and the goods never touch India. Para 7 of Schedule III to the CGST Act says such a supply is neither a supply of goods nor of services. So no GST is charged on that sale.

That does not end your tax work. Your profit is still taxable income in India. Money from abroad must come in through proper banking channels. And the store subscription, apps and ads you pay for abroad may carry GST under reverse charge once you are registered. Have a CA look at these before your first month closes.

The mistake people usually make

The most common one is waiting for Rs 40 lakh. A dropshipper selling across India from a website crosses no turnover limit, yet has had to register since the first inter-State order. Late registration means tax for those months comes from your own pocket, with interest.

The second is the wrong place of supply on the supplier's bill, as in the example. Check the first few bills line by line.

The third is letting the supplier put its own invoice in the parcel. On paper the supplier then sold to your customer and you sold nothing, which does not match your GSTR-1 or your bank receipts.

Do it yourself or get help?

A single-State seller with one Indian supplier can manage the monthly returns alone once the invoicing is right. Get help at the start, when the model is chosen and registration is filed, and again if you add foreign suppliers or buyers.

Frequently asked questions

Read next