MAY 31, 2016

By Neeladri Chakrabarti, Corporate Lead, Indirect Tax, CMC Limited

IN the last few years, one of the sectors which shows exponential growth in India has been the E-Commerce industry. Today, the concept of E-Commerce does not merely encompass electronic retail websites but has cast its ambit over knowledge management, provision of essential services, exchange of data etc. In other words, any transaction which takes place in the realm of cyberspace, in the absence of physical boundaries for both transaction and services, which involve any consideration changing hands, can be technically called E-Commerce transaction.

We have had a historical problem is dealing with these E-Commerce transactions. The present laws and the administration have been tailored to tax transactions based on their physical presence, their origin and movement. However, where almost all transactions are completed over server space, or where intangible goods are involved, the law is handicapped to identify the nature of taxation, if any, applicable. Since, the identity of source/origin of goods, their consumption patterns are mostly electronic, the tax authorities are often clueless to apply a tax to the transaction. And, with the added revenue pressure, this leads to a complete travesty of the existing law.

A case in point is the recent travails of the Kerala VAT authorities to demand state VAT from Flipkart and Myntra (two prominent e-commerce portals operating in India) which was quashed by the Kerala High Court in October 2015 - 2015-TIOL-2510-HC-KERALA-VAT. The Kerala VAT Department (KVAT Department) issued show cause notices (SCN(s)) and passed demand orders on Flipkart and Myntra on the grounds that they were liable to tax under the Kerala VAT Act as they were purportedly dealers in the state and were conducting sale transactions intra-state. The High Court, on being approached by the portals and after exercising its writ jurisdiction, held that the KVAT Department had produced no evidence to prove that the portals were dealers under the state VAT Act and were hence required to register and follow the required compliances necessary for a dealer. There was no evidence adduced as to how the goods, which were merely delivered to customers in Kerala, formed sales turnover for the portals or whether the portals were actually engaged in selling such goods; or no consideration of the fact that the goods were being sold by actual dealers from other states, only registered on the said portals, after payment of Central Sales tax in the course of inter-state sale. The writ was hence allowed in favor of the e-commerce portals holding that there was no evidence to disprove the transactions were actually inter-state sales and the portals were merely operating as a marketplace.

This here is a classic case of the tax department jumping the gun and proposing to levy tax because an arm of an electronic transaction culminated in the home state. Instances like this are becoming increasingly de rigueur today. Recently, the state of Karnataka, in a half-hearted attempt to rein in e-commerce portals operating in the state, proposed that electronic portals deduct 1% of the monies payable to registered merchants and deposit the same as tax. This TDS proposition is completely contrary to any established state VAT laws which required tax to be paid only on quantified sales attributed to a registered dealer and not on monies paid/ received for facilitation where there no sale or purchase of goods. The authorities in Karnataka purportedly hold a view that portals are commission agents of the actual sellers and are hence dealers under the state VAT act. Hence, they insist that e-commerce companies register their warehouses and undertake statutory compliances under the VAT Act. The fact that, even if it is assumed that the e-commerce could be agents, they provide a service on a principal to principal basis and not sell goods on behalf of sellers to third parties is completely ignored by the VAT department.

And so the tryst with the various state VAT departments continues…

The advent of GST will change the course of taxation to a destination based tax. In other words, the payment of tax will depend on the state where the consumer is located. The unified market of taxation proposed by the GST regime may also help resolve the above complications through a simplification of the tax structure and an efficient flow of the credits system. Reduction in compliances like waybills, documentation like warehouse registration, and abolition of the absence of cross credit mechanism are some of the pros being touted of the proposed GST laws.

However, in the present absence of clarity, the need of the hour is a comprehensive law defining practice and procedures of the taxation system. Place of Supply and Place of Provision Rules must be drafted adequately to take care of these transactions with adequate reference maybe to international regulations like the Organization for Economic Cooperation and Development (OECD) guidelines. The change to a destination based system would require an overhaul of the supply chain of all the e-commerce companies leading to additional cost. The prospective rise in the tax rate and maintenance of warehouses may also increase capital infusion in the business. A transition to a Large Payer Unit Model (LTU), based out of a single state, would ensure optimal operations, but all of the above ultimately depends on the robustness of the law enforced.

It is important that in order to strengthen revenue collection, detrimental laws are not framed which constrict the growth of business in e-commerce. There is a requirement of maturity on all parties while drafting, which takes into consideration all essential aspects of the situation on ground. Guidelines on taxation of e-wallets, cash-on-delivery, gift vouchers, and anonymity associated with e-commerce transactions etc are some essentials to be addressed. The Government has opined that a policy for taxation of e-commerce is in the works which is a sound step forward. Overall, when the core aim seems to be promotion of investment and industry in India, the tax authorities should ensure adequate transparencies and safeguards to ease the burden of the tax payer in India.