E-commerce's tax woes: Amazon's Karnataka troubles show there's a long way to go

So when was the last time you logged on to the internet for an online transaction? Not a difficult one to answer, right? With modern technology entrenching our lives we have been impacted in many ways, including the way we transact. With the growing usage of online media, taxation of such transactions requires consideration.

The introduction of e-commerce and its continued growth has forced players to change the way business is conducted worldwide. It has facilitated creation of a competitive environment where users have a wide choice of products and services from across the globe and all this in the comfort of their homes. E-commerce allows sellers and consumers to transact in goods and services over an electronic platform. The internet serves as an enabler to sites that allow for trading in merchandise as well as for sites that provide services, such as concert and movie tickets, air, rail and hotel bookings, etc.

With the rapid evolution of e-commerce, the indirect tax authorities in India need to be cognizant of the variances of this industry as compared to traditional forms of transacting. Taxation of an electronic transaction needs to be addressed separately from the conventional way of taxing routine buy and sell transactions at brick and mortar stores.

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Recently, one of the world’s largest e-commerce giants was in the news as the Karnataka VAT authorities wanted to treat the company as a dealer even though the e-commerce company did not engage in any buy or sale of goods. State VAT authorities intended to levy VAT on the e-commerce company who has been classifying itself as a service provider by way of being an electronic platform provider (similar to a marketplace where sellers and buyers transact). For the services that it provides, the e-commerce company charges a service fee and is therefore, not registered with the state VAT authorities. The argument taken by the company is that ownership of goods does not get transferred to the company at any point of time and it only facilitates the sale transaction between the vendors and buyers for which they charge commission/fees. VAT/CST is paid by the vendors in the state from where they dispatch the goods against such online orders from the customers.

Similarly, earlier, on few occasions, the VAT authorities in Kerala expressed a view that online transactions where the consideration is on cash on delivery basis are subject to VAT in the state even though the movement of goods may have commenced from outside the state. In fact, the Kerala State Government has proposed to set up a committee to study the impact of online trade on the state revenue as the state government is losing its revenue due to boom in online trading.

In the service sector too, issues arise regarding the manner of taxation. It would be interesting to see how service tax would apply considering the recent introduction of the levy on radio taxis to a e-commerce business which offers a facility of connecting cab service providers to users through an electronic platform where customers pay for usage of cab with their credit/debit cards. Issues such as the person liable to pay tax and threshold limits etc. would be some of the aspects which would need to be addressed.

Another hindrance to this industry is on account of way bill (or road permits) requirements in some states for entry and exit of the goods into/ from the state. From a VAT perspective which is a state levy, the usage of road permits in case of inter-state transactions has gone online in some states, however in some other states there is still a mixed practice of manual and electronic issuance of such forms. All such requirements add to a lot of administrative and cumbersome compliance requirements.

E-commerce is at a prospering stage in India. The state and central tax authorities are in the process of gaining an understanding of the peculiarities of e-commerce business in India. Some traditional terms such as “situs of sale” or “appropriate State”, used frequently in trading transactions, may need to be amended to factor in the specific requirements of e-commerce transactions.

Problems in e-commerce transactions could range from determining the appropriate jurisdiction for tax compliance, whether an item needs to be treated as a ‘good’ or a ‘service’ to determination of buyer and seller’s location, etc.

The indirect tax system in India still needs to adapt itself to put in place an appropriate tax system for this emerging industry. Considering the phenomenal growth of e-commerce industry in India in the recent past, it would not be incorrect to state that this industry is still evolving and it would be appropriate for the tax administration to immediately address some of these concerns and formulate a law which helps in collection of tax coupled with minimum obstacles to conduct and development of such business.

The authors are Saloni Roy, Senior Director,and Vikas Garg, Director, Deloitte in India