In a move that could change the IT industry-friendly image of Telangana, the state government is planning to impose a tax on e-commerce companies, including Flipkart and Amazon.

While the proposal is likely to stir up a controversy, the government seems determined. "We are working on a policy framework to monitor all kinds of online transactions, including those of the e-commerce companies. The proposal is to set up a common server and to see to it that no one is out of the tax purview," commerce minister Talasani Srinivas Yadav said.

The minister complained of loopholes in the existing tax policy, courtesy which many traders and big companies are getting away without paying sales taxes. He said an amendment to the Value Added Tax (VAT) Act was required so that the tax base might be widened.

"As far as e-commerce is concerned, our government's policy is to encourage industries based on technology. However, there must be a proper monitoring system for regulation while ensuring revenues to the exchequer," said Srinivas Yadav, adding, "We have a meeting next week where the policy proposals would be discussed."

Sources in the commercial department said the state government was keen on the models being worked out in states such as Karnataka, Kerala and Maharashtra -- where governments are proposing to impose one per cent of tax on payments by buyers to sellers on e-commerce sites."We are waiting for a report from the commercial tax department which is working on the proposed tax regulation for the e-commerce industry. Based on the report, we will decide on the policy framework," said IT principal secretary Jayesh Ranjan.

The move, however, has dismayed the IT industry as the e-commerce companies chose to set up their largest fulfilment centers in Telangana owing to the government's industry-friendly stance. Both Flipkart and Amazon moved their fulfilment centers (warehouses) from Bengaluru to Hyderabad after the Karnataka government proposed to levy one per cent tax on an e-commerce transaction in the form of VAT (which is to be deducted at source).

"I think it would be a regressive step if the Telangana government decides to tax e-commerce firms. When e-commerce companies are looking at Telangana as an investment destination, the state must be competitive in terms of industry-friendly policies as compared to the other states," said Sandeep Kumar Makthala, global president of Telangana Information Technology Association. When contacted by TOI, the Flipkart spokesperson declined to comment on the issue.

The Telangana government, however, is firming up its stand and the officials said the policy formulation was on fast-track. "The e-commerce firms had agreed that they would cooperate with the state policy before they came here with their business proposals. They had committed to pay tax," said Jayesh Ranjan. "However, we have assured them that everything regarding the tax policy will be done in a consultative manner."