JULY 26, 2016

By Archi Agnihotri

RECENTLY, there has been an increase in the cases involving the demand of entry tax from e-commerce companies in relation to their inter-state transactions. Recently, the Gujarat High Court was faced with cases filed by two e-commerce giants challenging the amendment to the Gujarat Tax on Entry of Specified Goods into Local Areas Act, 2001 which brought e-commerce transactions within the entry tax net.

Controversy involved

As per the Constitution ¹, State Governments are empowered to levy entry tax. In view of this, State Governments have enacted respective legislations to impose entry tax on the entry of goods into the State for consumption, use or sale. Entry tax is payable by the person causing entry of certain goods into the State and is collected and deposited by such persons. Entry tax has been at centre of controversy for many years. ² Entry tax legislations have been challenged before various courts on the ground that the levy is against the concept of free trade and commerce under Article 301 of the Constitution and does not conform to the conditions set out under Article 304 of the Constitution. Various State legislations have been struck down by the respective High Courts on the ground that the tax is not 'compensatory' i.e. the entry tax collected is not utilized towards facilitation of trade and commerce by providing facilities like maintenance of roads etc. While the controversy regarding the constitutionality of various State entry tax legislations is currently being heard before the Supreme Court ³ , State Governments have amended the respective State entry tax legislations in order to bring e-commerce transactions within its net. Various States have imposed entry tax liability on e-commerce companies on the ground that these amendments are necessary to protect local dealers from unhealthy competition. The move to impose entry tax liability on e-commerce companies has lead to litigation regarding the legality and constitutionality of such amendments.

Pending Litigation in Various States

- Gujarat

On 1 st April, 2016, the Gujarat Government enforced an amendment made to Gujarat Tax on Entry of Specified Goods into Local Areas Act, 2001 by which the State Government not only amended the definition of 'importer' ⁴ to include e-commerce companies, but has gone a step further to mandate that e-commerce companies qualifying as 'importer' shall "collect the (entry) tax from the person for whom such facilitation has taken place". ⁵ This amendment was challenged before the Gujarat High Court. ⁶ The High Court vide interim order dated 28th April, 2016 has ordered that any tax which will be paid pursuant to the amendments will be subject to further orders of the Court. Another similar petition has also been filed. ⁷

The State Government of Uttarakhand on 9th November, 2015 amended the Uttarakhand Tax on Entry of Goods into Local Areas Act, 2008 to provide for a special mechanism for collection of entry tax on specified goods purchased online or through e-commerce platforms. Under the proposed mechanism, a transporter/courier or any other person including an importer bringing such goods, whether on his own account or on behalf of any other person, would be liable to pay entry tax, as may be notified. Vide notification dated 10th December, 2015, the State Government imposed entry tax at 10% on all items entering the state through e-commerce transactions. ⁸ However, the amended section in the entry tax legislation fails to clarify as to the meaning of 'taxable person' nor does the notification issued thereunder prescribe a procedure as mandated by the amended section in the entry tax legislation. The Uttarakhand High Court on 16th March, 2016 granted an interim stay against entry tax on goods purchased through e-commerce companies. ⁹ Despite this, Uttarakhand Government has further amended definition of dealer under Section 2(1)(b)(x) and provision regarding taxation of e-commerce transactions under Section 4A, of the entry tax legislation with effect from 31 st March, 2016. ¹⁰

Rule 110C of the West Bengal Value Added Tax Rules, 2005, was amended on 5th June, 2013. Under the amended Rule, courier/logistics companies making deliveries of taxable goods in the State are required to register themselves and generate waybills through an official portal. In order to generate the waybill, such company is mandatorily required to pre-deposit the entry tax. ¹¹ In a petition filed before the Calcutta High Court it is argued that the levy of entry tax is without any sound legal basis. The petitioner submitted that since the provisions pertaining to entry tax have been struck down by a Single Bench of the Calcutta High Court ¹² and the order has not been stayed in appeal, the State has no authority to insist on payment of entry tax in any manner or form. On the other hand, the State asserted that the facility extended to courier companies and the like under Rule 110C is a privilege and cannot be regarded as a right. The State submitted that it will not be possible for the State to realize the entry tax, if it is ultimately found that the relevant statute or the concerned provisions are intra vires the Constitution. The Calcutta High Court considered these arguments and in its order dated 5th April, 2016 held that the West Bengal Government cannot insist on the payment of entry tax and further held that "As a consequence, the petitioner will be entitled to generate waybills in terms of the said rule without payment of any entry tax and if the programme or the system has to be altered for such purpose, the state is directed to do so immediately such that no inconvenience is occasioned to the petitioner in the electronic generation of waybills without payment of entry tax ". ¹³

- Bihar

The Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993 was amended on 6th May, 2015 ¹⁴ to make all goods couriered to the State liable to entry tax at the hands of e-commerce logistics/courier companies. ¹⁵ The amendment has been challenged before the Patna High Court by way of a writ petition, which is currently pending. ¹⁶ It has been alleged that the imposition of entry tax runs contrary to two Division bench judgments of Patna High Court ¹⁷ as also the judgment of Supreme Court in State of U.P. and Ors. v. Jaiprakash Associates Ltd . ¹⁸, as it creates a trade barrier.

Similarly, Assam also amended Assam Entry Tax Act, 2008 ¹⁹ to insert Section 9A thereby empowering the Commissioner to issue notification prescribing a procedure for collection of entry tax on entry of goods made through online purchase/e-commerce and also for collection of entry tax from a person other than an importer but on behalf of the importer ²⁰.

Odisha, Rajasthan, Mizoram and Himachal Pradesh have also amended their respective entry tax legislations. Uttar Pradesh, Madhya Pradesh, Jammu and Kashmir and Punjab have also proposed similar amendments. This is likely to result in similar legal/constitutional challenges.

A major issue which has been raised by the e-commerce companies is that it is an aggregator. It provides a platform for the buyer and seller to trade. Entry tax is imposed on the person brining in the goods to the State for his consumption, use or sale. However, e-commerce companies do not engage in these activities. Goods are delivered by a logistics service provider, which collects the goods from the sellers and delivers it to the buyer. The contention of the e-commerce companies before the Gujarat High Court is that it is an aggregator connecting sellers and buyers and not one which is into manufacturing or trading. The selling party has to pay the tax either to respective State or Central Government in the form of Central Sales Tax. If entry tax is levied on e-commerce service providers, it would be considered as 'double taxation'. Further, before the Uttarakhand High Court it has been argued that while the standard rate of entry tax is 5 per cent, goods purchased through e-commerce companies are subjected to 10 per cent, making them expensive as compared to products bought offline, and it is further submitted that this has not been adequately justified while carrying out the amendment. In case of logistic companies as well, it has been submitted that these companies do not bring in the goods for their own use, consumption or sale and are in fact simply delivering the goods from the seller to the buyer.

Conclusion

The States are awed with the business being made by the e-commerce companies and wish they they too get a share of the creamy pie. But legislations made to collect revenue from these business models need to be intelligent & far ahead of time if they have to stand up to the rigors of challenge in the court of law.

While a nine-judge bench of the Supreme Court is set to determine the fate of constitutionality of the entry tax legislations, all eyes are on the introduction of GST which is slated to subsume entry tax. It is hoped that GST will bring in uniformity and transparency in tax imposition and collection, resulting in a more conducive atmosphere for e-commerce business to grow.

Footnotes

¹ Entry 52, List II of 7th Schedule, Constitution of India, which provides as follows:

"52. Taxes on the entry of goods into a local area for consumption, use or sale therein."

²  See Atiabari Tea Co. Ltd. v. State of Assam AIR 1961 SC 232; Automobile Transport (Rajasthan) Ltd. v. State of Rajasthan 1962 AIR 1406 ; Jindal Stainless Ltd. v. State of Haryana - 2006-TIOL-34-SC-MISC-CB

³ Vide order dated 11th May, 2016 in SLP (C) No. 33923/2012 titled M/s Vedanta Aluminum Ltd. v. State of Orissa and Ors - 2016-TIOL-75-SC-CT-LB ., it was directed that the nine-judge bench will hear the connected cases on this issue on 18th July 2016

⁴ Section 2(e) of the Gujarat Tax on Entry of Specified Goods into Local Areas Act, 2001

⁵ Section 3(2A) of the Gujarat Tax on Entry of Specified Goods into Local Areas Act, 2001

⁶ C/CSA/7019/2016 titled Flipkart Internet Pvt. Ltd. v. State of Gujarat

⁷ C/CSA/9121/2016 titled Amazon Seller Services Pvt. Ltd. v. State of Gujarat

⁸ Notification No. 977/2015/22(12)/XXVII(8)/2008 dated 10th December, 2015

⁹ WPMS 432/2016 titled Instakart Services Pvt. Ltd. v. State of Uttarakhand

¹⁰ Notification No. 108/XXXVI(3)/2016/16(1)/2016

¹¹ Notification No. 765 FT dated 05.06.2013 read with Trade Circular No. 11 of 2013 dated 10.07.2013 titled "Import of taxable goods by way of purchase through online shopping for personal use not meant for sale"

¹² Judgment dated 24.06.2013 in W.P. No. 11407 of 2012 titled Tata Steel Limited and Anr. v. State of West Bengal and Ors. W.P. No. 11407 of 2012

¹³ W.P. 6109 (W)/2016 titled Instakart Services Pvt. Ltd. v. State of West Bengal

¹⁴ Part-2 of Bihar Finance Act, 2015 (Act No. 9 of 2015) notified on 6th May, 2015

¹⁵ Amendment to Section 2(1)(b) and Section 3AA of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993

¹⁶ CWJC No. 6155/2016 titled Instakart Services Pvt. Ltd. v. State of Bihar

¹⁷ Indian Oil Corporation Ltd. v. State of Bihar reported as (2007) 10 VST 140 (Pat.) and Food Corporation of India Ltd. v. State of Bihar and Ors. 2008 (13) VST 41 (Pat.)

¹⁸ 2013-TIOL-55-SC-MISC

¹⁹ Notification No. LGL 109/2008/66 dated 2nd September, 2014

²⁰ Notification No. CTS-62/2014/53 dated 23 rd December 2014 and Notification No. CTS-62/2014/60 dated 30th July, 2015 issued by Commissioner of Taxes, Assam

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