The debate on Goods and Services Tax or GST is gaining momentum, and hopefully, in the Budget session of Parliament, the Constitutional Amendment Bill will be passed by both Houses. This will be the strongest indication that the GST introduction is well and truly on course. Industry has, in no uncertain terms, expressed on more than one occasion that GST is the need of the hour if the desired economic growth and investor confidence is to be achieved.

The one sector that will keenly watch how GST will pan out is the e-tailing sector. In recent times, the sector has had its fair share of brushes with the VAT authorities. Interestingly, these questions seem to have been raised only when online shopping has grown in enormous proportions in India, and every tax authority seems to want a share of the revenue that this sector contributes. The earlier, more docile forms of e-commerce such as online ticketing, music and even software downloads did not evince such extreme reactions from VAT authorities. The business models in this sector are not only varied but also complex. One view is that the restriction of FDI in e-commerce that has given rise to such innovative structures.

Some companies only provide a platform for sellers to register themselves and facilitate a transaction with the buyers. Others, in addition to this service, also undertake the responsibility of delivering the goods (fulfilment) to the buyers. A third variant in this sector is a pure play buy-sell model where the goods are sold by the e-commerce company itself. The model that provides the fulfilment services is the one that has attracted the attention of the VAT authorities, who are inclined to say that the company, since it deals with the goods, in some form or the other, actually acts as an agent of the seller and is therefore, liable to pay VAT. Though the anxiety of the VAT authorities seem to originate from a 'revenue leakage' perspective, it also seems to be driven by the ease of monitoring one 'commission agent' versus hundreds of dealers. Therefore, the basic question that has been raised in this model is: 'Who is the seller?' The States, too, seem to be divided on this question. Maharashtra has accepted companies providing fulfilment services to be service providers and approved registration for hundreds of dealers in a single warehouse belonging to the e-commerce companies. Karnataka, on the other hand, seems to have led the charge against these companies, with many other following suit; some, waiting and watching.

Whilst the e-tailers continue to grapple with this situation, there is expectation that GST may be the answer to their problems. The Constitution Amendment Bill seeks to define services as anything that does not constitute a supply of goods. In the fulfilment model, there is a supply of service between the e-commerce company and the enlisting seller, but there is a supply of goods between the seller and the customer. The GST will change the point of levy from 'sale' to 'supply', but the fundamental question of 'who is the supplier' may well remain. It is very clear that our current laws do not afford an immediate answer to this problem, but any solution must keep the FDI angle and the tax angle apart from one another.

Tax controversies regarding e-commerce are not peculiar to India. Earlier this month the EU shifted the place of supply of electronically supplied services to the location of the customer, from the place of the provider. Therefore, the VAT rate of the customer's state has to be applied, and the supplier will have to obtain a registration in that State, or use the Mini One Stop Shop system, which provides for payment of taxes in multiple states, with a registration in one single State.

States protecting their taxing turf and revenues is not new; neither is the feud between brick and mortar sellers and e-tailers. The advent of e-commerce in the USA saw the States taking measures to protect their revenues, and enacting what is referred to as 'Amazon laws', thereby paving the passage of the Market Fairness Act in 2013.