Tax trouble returns to haunt Flipkart, others as Kerala slaps Rs 54 cr penalty

In a sign of continuing tax trouble for e-commerce in India, the Kerala state department has slapped a fine of up to Rs 54 crore on a slew of e-retail players for evasion of sales tax in 2012-13 and 2013-14, media reports said today.

The companies that have come under scanner are Flipkart; Jabong; Vector E-commerce Pvt Ltd, which has a stake in Myntra; and Robemall Apparels Pvt Ltd, which operates garments retailer zovi.com, said a report in the Malayalam daily Malayala Manorama. According to the report, the highest fine has been imposed on Flipkart - Rs 47.15 crore. Meanwhile, Jabong has been fined Rs 3.89 lakh, Vector E-commerce Rs 2.23 crore and Robemall Apparells Rs 36 lakh.

The sales tax department has said the companies have been penalised for evading taxes for the last two years and that they are looking at other online retailers too. Once found guilty, they will also be fined, tax officials have told the newspaper.

Justifying the move, tax officials have said that though these online retail companies do not have physical showrooms, their websites, where they display the products and prices, serve the purpose. Since these companies sell the products to the local customers, regional taxes are applicable, the officials have been quoted as saying in the report.

“While the products are being delivered to the customers, we treat it as local trade. Even though the purchases are being done through virtual platforms and not directly from showrooms of these companies, these transactions are taxable. We have the legal backing to tax these purchases,” a report in The New Indian Express newspaper has quoted an official as saying.

Image: Flipkart website

According to V Satheesh, Intelligence wing Deputy Commissioner, qouted in the NIE report, online retail falls "under the purview of the definition of business, trade, goods and sales as per the General Clauses Act 1897 , Sales of Goods Act 1930, Transfer of Property Act 1882 and Kerala Value Added Tax Act 2003. He has told the newspaper that the department is confident that they will succeed even if the companies approach the court.

Earlier in 2014, online retailers such as Jabong, Myntra, Flipkart and Snapdeal had stopped delivery to Kerala cities as the state tax department had banned cash on delivery serices. The department said it considers such transactions as a sale that happened in the state and hence are liable to pay sales tax. However, later in June, they resumed the cash on delivery services in the state, though the ban was still in place.

This is not the first time that e-commerce companies are facing tax issues in India. Earlier, the Karnataka tax department had banned Amazon's Indian arm from selling electronics and few other select products from its warehouses situated in the state. The state department had cancelled licences of about 100 vendors who sold products through the company's website.

Amazon and other e-commerce companies are operating thourgh a marketplace model in the country as the laws here do not allow foreign direct investment in e-retail.

Amazon classifies itself as a service provider and has argued that it doesn't own the goods sold through its website since they do not get transferred to it at any point of time. It only facilitates the sale transaction between the vendors and buyers for which they charge commission/fees.

The whole issue highlights how unprepared India is to cash in on the ecommerce boom that is on in the country.

As Deloitte's Vikas Garg notes in this Firstpost article, "The indirect tax system in India still needs to adapt itself to put in place an appropriate tax system for this emerging (e-commerce) industry."

The solution lies with the goods and services tax. The government should resolve all the issues regarding the much-debated and awaited tax reform and roll it out at the earliest.