Amending VAT laws will boost revenue from e-tailers
July, 27th 2015
Amazon committed to invest $2 billion in India. But recently, the firm announced that it would place on hold all further warehousing infrastructure investments in Karnataka, choosing to invest instead in ostensibly more tax-friendly Telangana. In spite of this, Karnataka Chief Minister Siddaramaiah reportedly declared that e-commerce players would have to play by the rules of the state which seeks to force companies to pay VAT on behalf of sellers. To add to the debate, State opposition leaders claimed that Karnataka was losing Rs 2, 000 crore in taxes every year by allowing e-commerce players to get away without paying taxes.
The crux of the confusion is the country’s sales tax or value added tax (VAT) which is a State subject. While sales tax or VAT is ultimately paid by the buyer, the responsibility for collecting it and depositing with the government lies with the seller. The Karnataka State VAT Act brings the seller under the regulation of the State VAT department by requiring them to take a VAT registration and mandates them to pay taxes and file returns on a monthly basis.
E-commerce players typically run a marketplace model for e-commerce, which means that sellers are registered with the VAT department and have the responsibility for paying taxes and not the marketplace company. From what we know from media reports, the Karnataka government has taken a stand that Amazon and others who follow the marketplace model, must get themselves registered as commission agents and pay taxes on behalf of the sellers.
These marketplace players have refused saying that they have a commercial arrangement with sellers and cannot be classified as being an agent on behalf of sellers. It must also be noted that a classification as commission agent would likely push these e-commerce players to be held in breach of FDI rules which prohibit them from holding inventory, even as an agent. These marketplaces thus find themselves in apparent conflict between the Karnataka government’s classification of it as a commission agent and the FDI policy that recognises the marketplace model.
Certain political leaders – outside the government - have claimed, though denied by the Commissioner of Commercial Taxes, that Karnataka is losing VAT revenue because of the stand taken by e-commerce players. E-commerce players deny any loss to the State exchequer since all taxes are paid by the sellers and there is no allegation that sellers are evading taxes. In fact, these players have committed to share with the State VAT department details of all transactions conducted by sellers on their marketplaces to allow audit compliance.
The government says Amazon and the likes need to pay VAT. The standoff has specifically resulted in Amazon underutilising its warehouse infrastructure in Karnataka for the last six months since the VAT department cancelled the registration of several sellers on the platform, thereby preventing the Karnataka-based sellers from availing of Amazon’s marketplace platform to sell both within and outside the state.
E-commerce players lose simply because they find themselves unable to fully utilise the existing warehouse infrastructure within Karnataka, invest and expand, since they are denied an opportunity to bring sellers to sell on its platform.
The Karnataka based-sellers are clear losers since the state’s stand effectively denies them from leveraging the e-commerce platform and sell to potential customers in Karnataka and elsewhere in India. They are thus excluded from participating in the explosive growth of e-commerce while sellers in other states climb the e-commerce bandwagon and sell to the rising tribe of customers - including customers in Karnataka itself – by invoicing from other states outside Karnataka.
Deprived of sales tax
Through its stand that has effectively resulted in a near freeze of e-commerce sales originating from Karnataka, the state finds it deprived of sales tax that could have come to its kitty if it had let the sales happen in the first place. The State government is thus pushing a case that has effectively robbed itself of an opportunity to grow tax collections.
Salubrious growth of the e-commerce industry attracts investments in warehousing infrastructure, last mile and first mile logistics and transportation. All these investments create employment. Now, these jobs and investments are going to Telangana which has laid a red carpet for players such as Amazon.
The standoff can be resolved to the benefit of all stakeholders. The e-commerce players need to demonstrate visible compliance with tax laws. They must lay bare their transaction system to the state VAT department and share electronic data about sellers in a state and their transactions on their platform. They must share with VAT authorities information in adequate granularity that would help the tax machinery audit tax compliance of sellers.
They must enforce checks to make sure that only tax registered sellers sell on its platform. The State government must shed its stand of forcing e-commerce marketplaces to register as a commission agent. Instead, it must think differently by getting the e-commerce giants to act as partners to boost tax revenues. It can do this by amending its existing VAT laws to recognise e-tail marketplace business models. It must also promote the cause of small and medium sellers in the state by simplifying VAT registration.
If this formula is followed, a crisis and standoff can be converted into an opportunity. There is no reason why Karnataka – birthplace of the software industry – cannot become a model state for e-commerce.