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New tax tangle for e-commerce firms: Karnataka proposes a 1% levy on payments
October, 08th 2015

Amazon India, Flipkart and their rivals could soon face tax complications with Karnataka proposing a 1 per cent levy on payments by buyers to sellers on ecommerce sites, a move that could encourage other states to follow suit.

The planned levy, in the form of value-added tax deducted at source, was discussed at a closed-door meeting called by Karnataka's principal secretary, finance department, on Monday. The National Association of Software and Services Companies ( Nasscom) lobby group has been asked for its response to the plan, said two persons aware of the meeting. The ecommerce sites are opposed to the proposal, they said.

Flipkart declined to comment. Amazon did not respond to emailed queries.

Amazon India and Flipkart have fulfilment centres in Karnataka.

Goods supplied by producers are kept in these centres before being shipped to customers. The two companies also have their head offices in Bengaluru, suggesting that the bulk of their business could be impacted by any such levy.

If put in place, ecommerce companies will have to deduct 1 per cent of payments made to vendors before passing the money on, making goods costlier for consumers.

The state says the levy will help keep tabs on the revenue of sellers, who would be able to claim credit for the tax. The authorities feel this will ensure that disclosures are accurate and companies are paying the right amount of tax, said one of the persons cited above.

Tax experts said such a levy would increase the compliance burden on the companies.

New tax tangle for e-commerce firms: Karnataka proposes a 1% levy on payments by buyers to sellers

"Placing the onus on the ecommerce marketplace to deduct TDS (tax deducted at source) on the goods sold through it is against the very principle of VAT on goods and detrimental to the ecommerce environment in the country," said Bipin Sapra, partner, EY.

Taxation of ecommerce companies has been in focus for some time, particularly after Karnataka questioned Amazon's fulfilment centre model and sought to impose value-added tax on goods sold through the site, treating it as a commercial agent, a characterisation that the company has rejected.

Taking a cue from this, states such as Uttar Pradesh, Kerala and Delhi have sought to increase scrutiny on marketplace ecommerce platforms and made disclosure of monthly sales data mandatory for vendors registered with them.

Most ecommerce sites are structured as marketplaces that facilitate trades between buyers and sellers to stay in compliance with overseas investment rules. India does not permit foreign investment in business to consumer (B2C) ventures.

With ecommerce growing at a rapid pace in the country, state governments do not want to lose out on revenue. In most cases, invoices issued for online purchases show taxes levied, but states are not willing to take any chances as these companies have complex delivery structures.

Marketplace firms have argued that they only facilitate sales and are not sellers themselves, so they shouldn't be dragged into the tax net.

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