All you want to know about Amazon India's tax issue

Prime Minister Narendra Modi has set up a committee to identify "obsolete" laws which hamper governance by creating avoidable confusion. But this is not enough, the government will also need to think about enacting new laws to meet with the changing times. Take the case of e-commerce business in the country.

 

Karnataka tax authorities have stopped Amazon India from selling some products from its warehouse in the state by cancelling the licences of third-party merchants who supply goods to the Amazon’s Karnataka warehouse. The problem is not of tax evasion by Amazon or its merchants but a case of interpretation of the law.

 

 

India along with most other countries does not have a law on how to tax new businesses like e-retailing. Imposition of tax is left to the interpretation of the local authorities. Since sales tax is a state subject, companies working across the country have to deal with different interpretations.

 

According to a Livemint report the Karnataka 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 notices say these merchants cannot register Amazon’s warehouse as their ‘additional place of business’.

 

‘Additional place of business’ or Branch Certification is a concept which falls under the purview of sales tax or value-added tax. To understand it under the present context of Amazon let’s look at how the e-commerce space works.

 

For an e-commerce company like Amazon, Snapdeal or Flipkart sales takes place in two forms. In the most basic form these companies offer a platform where the buyer meets the seller on the website after he chooses a product. Sellers are merchants who showcase their products on the website of these e-commerce companies. If the product and its price meets the buyers requirement a sales transaction is initiated. In such a transaction the website is only facilitators and gets a commission for providing the service. The e-commerce company has to pay a service tax on the commission (for service provided) it has collected. There is no question of sales tax or value added tax in such a transaction.

 

But these days e-commerce companies are no longer plain vanilla platform providers. With the help of data warehousing, data mining and analysis e-commerce companies have developed software’s to predict customer preferences and interpret which products will be in demand. To save on time, logistic cost and earn a little extra money, e-commerce companies store goods they feel will be doing well and will be fast moving. This type of transaction is the bone of contention between Amazon India and Karnataka’s tax authority.

 

Amazon India, as per Livemint, maintains that in such type of transaction called ‘fulfilment’ the company is only a service provider and at no point does it owns the products or sells it. In these cases the products are purchased by the customer and Amazon India is only providing services of storage, delivery and collection of money for the seller. After Amazon collects the money from the sale, it deducts its commission and passes on the rest to the merchant, who in turn pays the sales tax.

 

Taxmen on the other hand say that Amazon is liable to pay the tax as for all ‘practical purposes’ the ownership of the good is transferred to the e-commerce company till they sell it. One way of looking at it is that Amazon is stocking the products as any shopkeeper with a buyback clause with the manufacturer that they will give the product back if it remains unsold. Logic behind the tax authorities demanding tax could be that since Amazon India stores products of more than one kind and that too not in a random fashion but there is some science behind the stockings, there is an element of value-add. Taxmen might not be viewing it as a simple case of providing service.

 

To break the logjam, an Economic Times report says that Amazon India has  suggested that the government introduce a rule making it mandatory for online firms to furnish details of transactions, seller’s identity and VAT collected to tax authorities to help them cross-check compliance. Karnataka state government on their part have asked tax authorities to go easy on the clampdown on dealers until an amicable solution is reached.

 

For the government there is no loss of revenue since the tax if not collected from Amazon, is being collected from the merchant.