Flipkart opposes entry tax by states: Why it is a fight to the finish

The products you buy online are likely to get costlier if state governments have their way. Uttarakhand government has imposed an entry tax of 10 per cent on goods purchased from e-commerce firms. Bihar and Assam have already imposed an entry tax, which is now likely to be imposed by several other states.

An entry tax is a tax that a state government imposes on goods coming in from other states.

Naturally the e-commerce industry is crying foul as it increases the cost of the goods for its customer. Flipkart has already moved the Uttarakhand High Court (HC) against the 10 per cent entry tax. In a petition filed with the court in February, Flipkart argued that the state’s move to impose such a high entry tax was discriminatory.

This is a classic case of fight between two parties, both claiming to be victims.

It is an established fact that aggressive pricing by e-commerce companies has not only hurt the brick and mortar retail setup but has also affected the companies themselves who follow such predatory pricing. Most of the ecommerce companies operating in India are making losses as they fight for market share under-pricing each other, in many cases below the cost of purchase. In the process the mom-and-pop retailer shop, are also taking a hit. Madhya Pradesh’s finance minister is on record saying that 20-30 per cent of the state’s commerce has shifted online.

From the e-tailers point of view, imposition of entry tax is an additional barrier and goes against the spirit of free access to market. It is a case of the honest taxpayer getting taxed twice. Taxes are imposed at the point of sale and then again when it enters a new state (entry tax). E-tailers are complaining against this double taxation which is increasing the cost of goods for the final customer.

State governments have a point when they say that e-commerce companies have impacted their tax collections. Sales tax revenue has fallen as shops in the states have either closed down or have posted lower sales. These governments want their pound of flesh in tax collection from the goods that are sold in their state without paying any taxes as well as want to protect their local industry, which in many non-producing states are these small retailers.

We can draw a parallel between the actions of the state governments with that of the centre who decided to impose high level of taxes (import duties) on steel imports. Cheap steel was destroying the domestic industry leading to closure and loss of jobs. Similarly cheap goods from e-commerce companies who have the benefit of bulk purchase and are not the manufacturers themselves, has been destroying the state’s industry, employment and government’s revenue. In order to safeguard these, the entry tax seems to be a solution, however crude it may appear.

But then this is just a small window that the government have till the GST (Goods and Service Tax) is imposed which will bring a uniform tax structure across the country. Little can be expected from the legal battle that has been taken up by Flipkart in the near future. A similar battle is being fought by Amazon with the Karnataka government for the last 18 months and we are nowhere close to a solution.

With the pressure of valuation, especially after investment in Flipkart was marked down by Morgan Stanley, e-commerce companies would not like to see their business shrink. The only way forward for them in the race for achieving maximum gross merchandise value (GMV), is that these companies will have to absorb the higher taxes. This would mean higher losses and probably further hit on their valuation.