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Karnatakas VAT tweaks may force Amazons exit from the state
October, 31st 2014

Karnataka's commercial taxes department has proposed a set of amendments to its VAT Act of 2003, which if cleared by the legislature, might well signal the end of American e-commerce giant Amazon's business in the state. The department has sought to bring e-commerce firms under the definition of 'dealer' and proposed amendments to sections 8 and 22 of the VAT Act.

The section 8 is about the 'agents' liable to pay tax while section 22 deals with the liability on the part of dealers to register with VAT authorities. If the state government were to accept these proposals and effect changes by pushing through an amendment bill, Amazon may have little choice but to exit Karnataka because the FDI regulations don't allow the Seattle-headquartered firm to register either as a dealer or as an agent.

The e-commerce giant, which reported global revenues of $74.5 billion last year, does not directly sell products in India. Instead it connects buyers and sellers through its portal, It woos local merchants into partnership by offering them nationwide market, modern warehousing and packaging services for their products.Officials said the finance department is vetting the draft amendments sent by the commercial taxes department.

The proposals are yet to reach Chief Minister Siddaramaiah, who also holds finance portfolio, for a final view. His senior party colleague and Congress general secretary Digvijaya Singh has already resisted any moves that will seek to tax e-commerce firms for merely facilitating sale transactions. Karnataka's additional chief secretary K Ratna Prabha, who heads the commerce and industries department, has written to chief secretary Kaushik Mukherjee, urging him to find a solution to the crisis and ensure Amazon does not quit the state.

Amazon is doing business in the state using its warehouse near Hoskote in Bangalore Rural district as the VAT authorities are going slow on cancelling branch certificates they had issued to dealers who have partnered with the ecommerce firm. Congress leader M Veerappa Moily, in whose Lok Sabha constituency Chikkaballapur Amazon's warehouse is located, has expressed his displeasure at the proposed amendments.

"The authorities should understand the business model of e-commerce firms. Amazon, for example, is only a platform. You cannot tax a platform; you can only tax a commodity. No commodity can escape taxation at the appropriate stage of transaction," Moily, also a former chief minister of Karnataka, told ET. "If Karnataka does not want to encourage companies like Amazon, it is shutting out vast business and investment opportunity, and also tax revenues from potential growth in e-commerce business."

Tamil Nadu's finance department, too, is pushing for amendments to its VAT laws to accommodate e-commerce business, but in ways different than that in Karnataka. The VAT authorities in the neighbouring state are pushing for amendments that will require e-commerce firms to share details of transactions carried out through their portals and the dealers involved.

The VAT authorities in Tamil Nadu are not bothered much about the nature of business model followed by an e-tailer as long as tax is paid on sale transactions. Meanwhile, Amazon is building a modern warehouse in Tamil Nadu to serve the Chennai market. Earlier this month, Tamil Nadu's commercial taxes commissioner Rajaraman had told ET: "We will issue branch certificate to dealers partnering with e-commerce firms upon request and expect dealers to invoice transactions. The e-commerce firms, however, are liable to disclose the information about all transactions done on their platform along with details of fulfilment centres/warehouses operated by them."

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