Entry tax has been a trouble area for online marketplaces for almost a year now. They claim it is the Government’s plan to make revenue off of online retail. On the other hand, the government states that it is just a measure on their part to equalize the playing field for local sellers within the state.
Recently, etailers Amazon and Flipkart lost the struggle against entry tax in Gujarat. The state High Court dismissed their petition and now etailers selling to consumers in the state have a pending tax amount.
The commercial tax department’s special commissioner, Aarati Kanwar mentioned that by March 2017 the amount collectable from online sales may extend beyond Rs.125 crore.
The online seller association, AIOVA met with special commissioner Aarati Kanwar in April to understand the workings of this new tax. The members of the association were asked to be a part of the stakeholders meetings where everything would be discussed. They attended 2 such meetings.
What do online sellers know about entry tax?
The group’s spokesperson explains, “A phone has VAT of 5% in Chennai, but in Gujarat, it is 15% due to the industrial and commercial policy of the respective states. Due to ecommerce, major sellers were billing from Chennai hence offering lower selling prices. This in turn would affect not only offline players but also sellers of the same product in Gujarat.”
AIOVA claims that sellers in Gujarat would maintain stocks in the state but would transact on marketplaces as sellers from other states. Thereby evading the 15% tax imposed. According to the seller lobby group, the entry tax in Gujarat is very different from other states because in their opinion, the department in Gujarat is looking at the removal of tax arbitrage.
The group says, “The difference between entry tax by Gujarat and other states is that other states implemented a specific percent on ecommerce transactions, which is ultra vires to the commercial taxes act provision for entry tax which can be implemented only on product categories.”
In Gujarat, the entry tax charged is the difference between the Gujarat VAT and the other state’s (that is where the seller sells from). For example, if the tax on a mobile phone is 5% in Chennai and 15% in Gujarat the entry tax for the goods would be 15% – 5% = 10%.
The spokesperson for AIOVA mentions that this rule existed all along irrespective of the industry or product being sold.
How could the average online seller be affected?
The government found that it was difficult to compile ecommerce data for individual sellers, so they took data from the ecommerce companies itself.
“When Flipkart and Amazon went into litigation in June, we had advised them not to do so as there were no merits to oppose it. However, Flipkart executives thought they could use the same grounds which were argued in UP and Uttarakhand and get this removed,” mentions AIOVA’s spokesperson.
The group informs us further that the high court asked etailers to maintain deposits of entry tax until judgement was announced. Sellers were not informed of the same, they state.
“Judgement was disposed off on reference of a supreme court judgement hailing the entry tax as constitutional. (State of Haryana vs. Jindal stainless). So, the money deposited was taken by the VAT department as entry tax,” AIOVA’s spokesperson says.
The association of online sellers managed to speak with Amazon and according to them the etailer agreed that it would bear the expense which was more than half of what the state of Gujarat had collected.
“This had to be brought to public knowledge because it could have resulted in a retrospective charge to online sellers, which most online marketplaces are doing these days. Till now there has been no collection of entry tax from the seller or consumers. Ecommerce websites have decided to take the hit,” informs AIOVA’s spokesperson.
Expecting GST to do away with entry tax
Etailers are probably waiting for the introduction of GST to do away with this tax imposed by different states. However, GST is expected to be delayed by half a year say sources aware of the matter.
If this happens to be the case can we expect marketplaces to transfer the cost of entry taxes onto their sellers?