Tax troubles of the e-commerce sector in India is heightening even as the political parties are engaged in a who-will-blink-first game on passing the GST bill in Parliament.
According to a report in The Economic Times, more states are following in the footsteps of Uttarakhand after the state imposed a 10 percent entry tax on goods sold online. Another report in the same news paper said the biggest player in the sector Flipkart has filed a petition in the high court of Uttarakhand against the levy.
The ET report says apart from Uttarakhand, Bihar and Assam have also imposed the tax on e-commerce goods.
Not just Flipkart, other e-commerce companies are also protesting the new tax, which they think is a method devised by the state governments to get some quick buck.
"The decision to impose such a levy without any ostensible justification seems not to be driven by clean hands," an industry official has told the ET, raising suspicion that the move may have been prompted by the retailers' lobby.
This is not the first time that e-commerce - a sunshine sector in the startup ecosystem - is facing such tax troubles.
Earlier, the Karnataka government had imposed sales tax on the goods sold by Amazon, saying the company was keeping the goods in the warehouses in the state and this amounted owning the items being sold. However, the company maintained that it was following a market place business model, in which it just plays the role of a facilitator or platform to conduct business. According to it, the tax should be levied on the sellers.
Amazon's rival Flipkart and a few other etailers had faced sales tax issues in Kerala too. The state tax department had levied Rs 54 crore penalty on the companies saying though they do not have physical showrooms, their websites, where they display the products and prices, serve the purpose of such a physical outlet. Since these companies sell the products to the local customers, regional taxes are applicable, the tax department had said.
However, in October 2015 the Kerala High Court had ruled in favour of the Flipkart. The court held as illegal the commercial tax department's order imposing the penalty on Flipkart and Myntra for alleged violation of the state's tax laws.
Allowing petitions by Flipkart and Myntra, Justice A K Jayasankar Nambiar wondered how the authorities could levy tax or impose penalty in the absence of any material to suggest that returns filed by the sellers had been rejected by concerned authorities.
The new tax troubles of the ecommerce has to be seen in this context. The root cause of the problem is that the tax laws of the country were formed much before the advent of ecommerce.
Flipkart, the biggest in the sector, started operations in 2007. Encouraged by its success in the next few years, many more ecommerce companies have sprung up in the country. For the tech-savvy consumer - not only in urban but even in semi-urban and rural areas - online shopping has become the norm. What is aiding the growth is the quick proliferation of smart phones.
But unfortunately for the sector, the tax laws of the country have not reformed as much. For instance, sales tax continues to be different for different states. The key reform that would have subsumed the different tax laws into one and treated the country as one whole market is GST, which remains deadlocked in Parliament.
What is particularly disheartening for the ecommerce companies is that the new levy comes at a time when the sector is facing funding troubles and also going through a reality check on valuation.
A week after Flipkart said its valuation is $15.2 billion, Morgan Stanley had reduced the valuation of its stake in the company by 27 percent. This had brought down the valuation of the company to $11 billion.
The fund crunch in the Indian startup space has been attributed to the global slowdown, particularly in China. Chinese giant Alibaba has witnessed a 10 percent fall in the value of its shares on NYSE in 2016 alone after the country's economic growth continued to decline.
If the government wants to give an impetus to the ecommerce sector, the need of the hour is to move fast on implementing GST.
Otherwise, ecommerce may turn out to be a big blot on the startup-friendly image of the NDA government.