In the last few days, e-commerce has been the most talked about subject. The phenomenal growth of e-commerce in developing markets attracted considerable interest of the buyer community at large. However, the volumes in this virtual economy also invited the attention of the tax authority in India.
Festive sales were not so delightful for some of the e-retailers as a series of probes into the functioning of these players were started by tax authorities. In a recent development, the Karnataka VAT (KVAT) authority issued notices to third party merchants (TPM) associated with online retailers to stop storing goods in warehouses maintained by these online retailers. Furthermore, KVAT authority is also contemplating charging local VAT on transactions happening on such e-commerce websites by treating them as “dealers” according to provisions of the Karnataka Value Added Tax Act, 2003 (KVAT Act).
What triggered the probe in e-commerce activities by the KVAT department?
Most e-commerce companies are located in Karnataka. The e-commerce companies generally operate under different business models out of which “Marketplace” model was the one which attracted the controversy.
In the “marketplace” model, the e-tailer stocks goods of TPM in his own warehouse. Goods are primarily stocked on the basis of technical analysis of customer choices recorded on the portal. This enables improved speed of delivery of products, since these are available in their warehouse. The intention of the e-tailer is to save time and logistical cost. Buyers place order for a product, which is processed by the website. However, sales invoice is raised by the TPM on the end consumer. The portal collects money from the buyer and remits the proceeds to the merchant after deducting its commission including charges towards storage of goods, etc.
TPMs are approaching the tax department to add e-tailer’s warehouse as their additional place of business in VAT registrations, which is also one of the terms and conditions for TPMs while enrolling in Marketplace model of the e-tailer.
KVAT Department’s contentions
The KVAT authorities contended that the e-tailer is supplying or distributing goods. This activity is covered in the definition of “dealer” according to the KVAT Act and they should be liable to pay VAT on online transactions. The department is of the view that the e-tailer stores different products of TPMs in warehouses based on technical analysis. It enables rapid deliveries of products. Department is of the view that there is an element of value-addition in this scenario.
Position adopted by online retailers in Marketplace model
E-commerce companies are taking a stand that they neither own the goods nor sell them on behalf of any seller. The goods, if remain unsold, are taken back by the merchant seller. They are only providing services such as storage, delivery, collection of payment from end customer, etc. for which they charge commission to the merchant seller. Hence, they are not liable to pay sales tax.
Relevant KVAT Act provisions and their analysis with respect to current scenario
The term “dealer” is defined u/s. 2(12) to include, among others, commission agent/broker who supplies or distributes goods directly or otherwise for commission on behalf of any principal.
Department contends that these e-tailers (as commission agents) fall into the definition of dealer. However, just because the e-tailer is becoming a dealer may not necessarily mean that it is involved in the activity, which is liable to tax. In this context, one needs to examine the “taxable event/ incidence of tax” as provided in the KVAT Act.
Section 3 defines the taxable event as, every sale of goods on which a registered dealer or a dealer who is liable for registration should pay tax.
The taxable event talks about “sale” defined in Section 2(29) to include “a transfer otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration”.
The explanation (3) to definition of “sale” is also relevant for the current discussion. This explanation deems two independent sales or purchases in case of selling/buying agent scenario, i.e., one from principal to agent and another from agent to third party based on criteria such as rate difference in two transactions, etc.
Let us analyse the applicability of above provisions to current case of online retailers’ marketplace model.
|Section||Gist of section||Applicability to the current case|
|3 – Levy of Tax||Tax to be charged on sale of goods||E-tailer not selling any goods to end consumer; hence, no taxable event (TPM raising invoice on end consumer and paying applicable tax)|
|2(29) Definition of Sale||Transfer of property in goods||As ownership of goods is not with e-tailer, how will they transfer property in those goods to the end customer?|
|Explanations to definition of sale||Deemed two independent sales in case of selling/buying agent||E-tailers, though charging commission for storage and logistics services, are not acting as selling agent for any particular TPM; hence, there cannot be two different sales —one from TPM to e-tailer and another from e-tailer to end consumer. Furthermore, TPM is not selling anything to e-tailer.|
Section 29 requires registered dealer to raise tax invoice on the customer and charge VAT on sale of goods. In this case, the TPM is raising tax invoice on customer. The transfer of title in goods also passes through tax invoice of TPM.
This is likely to lead to an absurd situation of same products being taxed twice in VAT and will also suffer the additional cost burden of Service tax paid by e-tailers on their activities. It can never be the intention of lawmakers to impose additional tax burden on the end consumer.
Section 8 casts specific liability on the agent to pay the tax on sale or purchases affected by him on behalf of his principal. The department is aggressively relying on this section for taxing e-tailers in the character of commission agent.
The definition of Mercantile Agent under Sale of Goods Act, 1930 suggests that the agent is a person who has authority to buy or sell on behalf of principal. In the case discussed here, the e-tailers do not buy or sell on behalf of seller/buyer, rather only facilitate a service where products are marketed on website for sale.
Legal position in other states
The provisions/definitions in many states’ VAT laws are similar to provisions as prescribed in Karnataka VAT. The VAT provisions of these states lack any specific provision on e-commerce transactions, which create ambiguity in taxing these transactions.
Tamil Nadu is also in the process of amending its VAT law after Karnataka’s move to do the same; however, it is unclear on which grounds Tamil Nadu Commercial Taxes department is proposing the amendments. If different sources are to be believed, the issues in Tamil Nadu relate to “cash-on-delivery” payment model (consideration passes in Tamil Nadu, i.e., sale completes in that state; hence, TN VAT should be paid), disclosures of e-commerce transactions in VAT returns, etc.
Interestingly, in Kerala, e-commerce companies have stopped delivering the goods as obtaining waybills for such small-sized deliveries becomes very difficult in the state.
Issues which need to be addressed
The department’s stand to tax e-tailers, poses some important question such as owning of risk in products stored in e-tailer’s warehouse, at what value should e-tailer pay VAT on such sales and whether e-tailer will get input tax credit on TPMs invoice when in fact it is issued in the name of end consumer.
If news reports are to be believed, KVAT authority seems to be targeting the probable high revenue opportunities, which may have adverse effect and result in exit of e-commerce players from the state. To treat these online retailers as “dealers” or “agents” will violate the Foreign Direct Investment (FDI) norms for multi-brand retail. Currently FDI in multi-brand retail is not allowed.
It is also feared that other states, where e-commerce companies have major operations, e.g., Maharashtra or Gujarat, will follow KVAT authorities. It is likely to affect the e-commerce economy in the country and will also worsen the position of India as an investment destination for foreign investors.