The recent trend of successive state governments targeting e-commerce companies by resorting to the highly controversial entry tax is worrying. The last 18 months saw states such as Uttarakhand, Bihar, Assam, Odisha, Gujarat, Jharkhand and Himachal Pradesh introduce specific provisions in their entry tax enactments to tax e-commerce transactions whereas states like Karnataka, Madhya Pradesh and Rajasthan have also announced their intention to levy entry tax on e-commerce transactions. If reports are to be believed, many other states are likely to follow suit.
Take the example of the legislation of Uttarakhand and Gujarat. In their bid to target e-commerce companies, these states have levied entry tax per se on all goods purchased through e-commerce transactions although under the general scheme, entry tax is levied only on those goods which find specific mention in the schedules to the entry tax legislation.
The levy is a clear deviation from the scheme as it targets a particular stream of business, viz. e-commerce. Usually charged as a percentage of the value of goods, entry tax significantly increases the cost of goods traded through e-commerce, in comparison to the cost of the same goods available at a store, thereby making the option wholly unattractive for the customers of these states as well as the retailers who wish to sell their goods through e-commerce platforms. In effect, the steep increase in the cost of goods makes the entire e-commerce business model unviable for both the sellers as well as their prospective customers.
Hence, it came as no surprise that the constitutionality of the amended Uttarakhand entry tax provisions were immediately challenged in the Uttarakhand High Court. The challenge was on two counts - first, for the discriminatory treatment meted out to goods purchased through e-commerce companies by specifically taxing such goods brought from other states at a higher rate and thereby violating the equality guarantee enshrined in Article 14 of our Constitution; second, for infringement of freedom of trade, commerce and intercourse of e-commerce afforded in Article 301 of the Constitution. In these facts, the Uttarakhand High Court summarily stayed the levy with a direction to release the seized goods. Perhaps the state government's approach to specifically target the e-commerce industry weighed heavily on the bench.
Unlike Uttarakhand and Gujarat, other states such as Assam, Jharkhand, Odisha and Bihar have restrained themselves from taxing goods purchased through e-commerce outright. However, these states have provided for a separate entry tax collection mechanism only in respect of e-commerce transactions, making the transporters or courier companies liable for payment of entry tax and thus exposing them to onerous compliance. In fact in Assam, a transporter is required to deposit a minimum of Rs 300,000 of advance entry tax after obtaining registration and fulfilling other compliance requirements on behalf of e-commerce companies.
While these states may argue that such a move is non-discriminatory, in reality it works to the detriment of the e-commerce companies as this aspect of compliance is to be weighted in light of the well-known fact that despite all claims of simplification, the very task of compliance itself under the Indian tax laws remains a time-consuming and tedious job, not to mention that it is seldom monetarily rewarding. Further, the intention of the states is suspect as it is perhaps the first time that transporters or courier companies are made responsible for compliance which otherwise is not their headache in the ordinary course of the business of transportation when done for domestic dealers.
As these registration and collection provisions equally impinge upon the very fundamentals of e-commerce trade, viz. free movement of goods, e-commerce companies have been prompt to challenge their constitutionality before the jurisdictional high courts. Hence, provisions of Assam, Jharkhand, Odisha and Bihar stand challenged and are pending adjudication.
Be that as it may, interestingly, a five-judge bench of the Supreme Court in Jindal Stainless Ltd (2006) has held that for a levy of entry tax to survive, it has to be established by the state that such tax is compensatory in nature, viz. it should provide a direct quantifiable benefit to the payee. Hence, the states have to show that a direct quantifiable benefit is provided to e-commerce companies. This is going to be a huge challenge as most of the e-commerce companies are registered in one state and their only interface with other states happens on account of purchase on "their e-commerce platform" by the customer in these states.
Further, it is not as if sales on e-commerce platforms are exempt from tax. In fact, any sale of goods to a customer is subjected to full levy of sales tax in the state of the selling dealer, viz. CST (central sales tax) at full rate, similar to retail sales that take place across the counter between the seller and the buyer where VAT (value added tax) is paid.
It appears that this antagonistic approach of the state governments towards the e-commerce industry stems partly from their ignorance of the gains of these companies to the economy and partly from their greed to garner maximum revenue even if it involves the much flayed regressive approach to taxation. In fact, expert studies of the e-commerce business model followed in the US and the European Union have shown that in the long run it proves beneficial to the economy.
The state governments must be conscious of the fact that the e-commerce industry is at a nascent stage in India and needs support through benign policies. The current approach of the states to levy entry tax on e-commerce transactions is clearly adversarial and deserves an urgent review.
(With research inputs from Dhruv Bhattacharya, associate.)
The author is partner, tax, at Economic Laws Practice, Advocates and Solicitors, Delhi
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