Traditional brick-and-mortar retailers, up in arms against e-tailers and the large private-equity-funded discounts they offer, now have the taxman also batting for them. As FE reported yesterday, tax officials of various state governments are up in arms against e-tailers. In a normal brick-and-mortar transaction, consumers in state A pay a value-added-tax (VAT) when they buy anything at the retail level, even if the good is being supplied from a manufacturer in a state B to a dealer in state A. In the case of e-tail, however, consumers from Delhi, for instance, can be ordering something from a firm based out of Bangalore. In this case, instead of Delhi getting the VAT, the taxes get paid to the Karnataka government. Indeed, going by the ongoing dispute between the state’s tax authorities and Amazon, not all the taxes that should be paid are getting paid either—Amazon says the vendors who sell on its platform have to pay the taxes since it is only a marketplace; the state plans to amend its VAT Act to ensure Amazon pays the VAT on behalf of the vendors who use its platform. This is something that has also been noticed by RBI too. It stated in the state finances report: “Taxing the burgeoning e-commerce space could bolster states’ own revenues, provided there is greater clarity around rules and procedures governing inter-state trade.”

One way out for states is to impose an entry tax, but that seems difficult since it has been held as unconstitutional by high courts. Introduction of the Goods and Service Tax will fix matters since, in the GST, details of all taxes will be available to the GST Network and, based on where consumption takes place, the central government will undertake to transfer their share of taxes to consuming states. In the interim, the states in which big e-tailers are based would do well to find ways to collect the taxes and distribute them to the consuming states. The states, of course, would do well to be careful and not be too heavy-handed. Small vendors don’t pay taxes anyway and, to the extent they are migrating to e-tail platforms, will present a larger base to tax when GST comes into operation.

Another worry relates to taxing products which are offered at deep discounts by online retailers. If a product’s MRP is R100, a 12% VAT means a collection of R12. In most e-tail transactions, however, the consumer price could be much lower, sometimes by 25-30%. Is the VAT to be levied on R100 or on, say, R75? The Fiat case could offer a way out since, in this case, the Supreme Court said excise duties had to be based on costs—but after the verdict, the CBEC came out with a circular that said the merits of each case would be decided at the level of the commissioner. Hopefully, the July 15 meeting of states with the central government would help resolve the issue.