States look to plug tax gaps in e-commerce

New Delhi: Indian states are looking at ways to tax e-commerce transactions to get a piece of growing e-commerce revenue, even as tax laws try to keep pace with evolving business models and corporate structures, especially in the context of most large e-commerce companies boasting marketplace models that connect buyers to sellers. At a meeting of the empowered committee of state finance ministers held in New Delhi last week, it was decided that a committee of state and Union government officials would look into the issue. The decision on forming the committee came after states expressed concerns about losing out on tax revenue because of gaps in existing tax laws. “The committee will look at how such transactions can be taxed under the existing laws. Other options like amending the Central Sales Tax Act will also be explored,” said an official from one of the states who asked not to be identified. An official from another state said the committee would recommend ways to tax e-commerce. “States have been deliberating how to plug revenue losses (arising from e-commerce transactions) for a few months, but it was decided in the 11 November meeting to go ahead and set up a committee to look into the issue,” added this person, requesting anonymity. With online sales growing rapidly, e-commerce firms are facing increased scrutiny from state tax departments. From the business models followed by such e-commerce firms to the high discounts offered, tax departments in states are grappling to plug what they see as revenue leakages. Online retail in India is worth $3.1 billion, or 10% of the organized retail market, and is estimated to grow to $22 billion, or over 15% of the organized retail market, in five years, according to a November 2013 report by brokerage CLSA. The Karnataka commercial tax department had stopped Amazon India from selling electronics and several other products from its warehouse in the state by cancelling the licences of merchants that work with the local unit of the world’s largest online retailer, Mint reported on 15 September. The Karnataka tax department wanted Amazon, Flipkart and others to pay value-added tax (VAT) on goods that are stored in their warehouses even before customers have ordered these products. Currently, a central sales tax equivalent to the VAT rate is only levied when goods move after a sale to a final consumer from one state to another, and the revenue accrues to the state where e-commerce firms have their warehouses. Since revenue accrues only to the states where such firms have warehouses, states where the sales originate (or where the customers are based) are also worried, said Satya Poddar, partner, tax and regulatory, policy advisory, at EY, a consultancy earlier known as Ernst and Young. “Most of the warehouses are situated in places like Gurgaon and Karnataka, and the revenue from such sales accrues to them under the CST (central sales tax) Act. Added to that, local dealers with brick-and-mortar branches are seeing their sales impacted and that is hurting revenues of states,” he said. Poddar’s reference is to the slowing and, in some cases, shrinking sales in offline or brick-and-mortar stores on account of the steep discounts and sheer convenience offered by e-commerce sites. He added that states will have to look at issues like how transactions will be taxed in cases where there is cash on delivery and the transaction is completed only when the goods are delivered and payment made, and also if such firms are marketplaces or vendors. This is because if the good had been sold from the warehouse to a retail vendor who then sells it to the final customer, then a 2% CST would have been levied in the state where the warehouse is located and the applicable VAT would have been levied by the consuming state when the retailer sells the good to the final consumer. This problem will, however, be solved once the goods and services tax (GST) is implemented. Under GST, the centre will levy and collect an integrated GST rate on inter-state sale of goods and then transfer the money to the consuming state. “States are worried that some of these firms are acting as commission agents. But so long as the appropriate tax at the correct rate is being paid, the e-commerce industry should not be made to suffer. Ultimately, the low prices they offer benefit the consumers,” said Krupa Venkatesh, senior director, Deloitte Touche Tohmatsu India Pvt. Ltd, a consultancy. “We welcome any and all efforts to evolve taxation policies that keep pace with the emerging digital economy and help us enable sellers of all sizes across the country to deliver a shopping experience that is convenient, reliable and fast,” an Amazon spokesperson said. “Specifically, we eagerly look forward to the GST legislation being finalized and the creation of a unified market across India which will have a positive impact for both sellers, consumers and manufactures in the country.” A Flipkart spokesperson didn’t respond to an email seeking comment. Shrutika Verma contributed to this story.

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This problem will, however, be solved once the goods and services tax (GST) is implemented. Under GST, the centre will levy and collect an integrated GST rate on inter-state sale of goods and then transfer the money to the consuming state

his problem will, however, be solved once the goods and services tax (GST) is implemented. Under GST, the centre will levy and collect an integrated GST rate on inter-state sale of goods and then transfer the money to the consuming state

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