Amazon's dispute with taxmen in Karnataka: All you need to know

E-commerce major Amazon, which recently poured in $2 billion into its India operations, has run into some regulatory trouble in Karnataka aftertax authorities ordered some merchants to stop storing the company'sproducts at warehouses due to a dispute over taxes.

The Enforcement Directorate is already looking into whether Amazon India has circumvented restrictions placed on foreign investors by selling directly to domestic consumers, but makingit look as if sales were made by other companies. Investigators are also examining whether Amazon exerts control over the prices of products sold on its website, Wall Street Journal had reported recently.

And now theKarnataka government has served notices to more than 100 third-party merchants, ordering them to stop storing their products in Amazon's storehouses near Bangalore. The dispute involves how much tax Amazon should pay on goods sold by third-party merchants and delivered to customers directly from its Bangalore warehouse. Since India does not allow FDI in the e-commerce space, companies like Amazon and Flipkart operate as market places where in they host third-party merchants on their websites rather than owning the products. Amazon has seven warehouses in India where it stocks goods. Amazon earns a commission on the services it provides to the merchants and pays a service tax to the Centre. However, tax authorities are now questioning this model.

What are fulfillment centres and how they work

Known as fulfillment centres, the warehouse stocks millions of products of all sizes across several categories. When using Fulfilled By Amazon, sellers across India send their products to Amazon's fulfillment centers and once an order is placed, Amazon packs and ships the order to the customer without the sellers having to do anything. Orders fulfilled by Amazon are eligible for Cash on Delivery, Free Delivery promotions, and Guaranteed Next-Day delivery and customers alsobenefit from Amazon's customer service and returns management, enabling sellers to focus on their core business.

Sellers save money by replacing their upfront capital expense with low variable cost and pay only for the storage space they use and the orders Amazon fulfils. Three-fourths of the orders placed on the e-commerce siteare fulfilled by Amazon.

Why do the taxmen in Karnataka have an issue with the Bangalore centre?

Currently, after the products are sold, Amazon gets paid by itscustomers and then pays it to the third party merchant after they have deducted their commission. The merchants then pay Value Added Tax (VAT) or sales tax to the government post that.

According to a report in Mint,tax authorities in Karnataka have raised concerns over the ownership of products that come under "Fulfilled by Amazon" category. They say that the ownership is passed to Amazon after the merchants delivers it to Amazon warehouses. Hence, they want Amazon to pay the VAT rather than the third party merchants.

On the other hand, Amazon disagrees and has said that they never owned any of the products and should not be asked to pay taxes on those goods. Amazon has also told authorities that they are just providing storage and delivery services to third party sellers and hence should not be liable to pay any kind of tax.

According to a report in Financial Times, Amazon has warned that it could be forced to close its Bangalore warehouse and suspend plans for other investments in the state, if a consensus cannot be reached.

Vaibhav Parikh, a partner at law firm Nishith Desai Associates, was quoted as saying in the Economic Times that if it is found that Amazon has violated law, they might have to change the way their fulfilment system works.

Apart from Amazon,Snapdeal, Flipkart and other online retailers are also expanding their operations in India, which means e-commerce presents both challenges and huge opportunities for taxation and tax administration. While it is important to avoid tax evasion, the government must ensure it should not result in either double or unintentional non-taxation which could set upa roadblock.

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Updated Date: Sep 16, 2014 09:11:03 IST