So ecommerce players in India not only have to brave competition, but they also have to face the music from archaic tax laws in the country. Amazon, one of the first names that come to mind when you think of online shopping, is in a soup, again!
Just last week the Wall Street Journal reported that the Enforcement Directorate (ED) began an investigation to find out if Amazon has violated India’s foreign direct investment (FDI) laws by selling directly to consumers. And now the warehouse of Amazon logistics segment has been seized by Karnataka tax authorities. The Karnataka government has cancelled licenses of third-party sellers who use Amazon as their marketplace. The notices served to these sellers, who wish to remain unidentified, prohibit them from storing their products in the Bangalore warehouses and from listing Amazon warehouses, or Fulfillment centres, as their “additional places of business.”
Amazon’s marketplace model makes it easy for merchants to find buyers, and convenient for customers to find legitimate sellers. To ensure fast deliveries, Amazon, at an added cost to the merchant, stores its fast-selling products in warehouses. This is how Amazon is able to provide next-day delivery for almost 60% of its listed products. This Fulfillment by Amazon (FBA) service earns the company a commission from the merchants, who in turn VAT to the government, while Amazon pays service tax. The taxmen believe Amazon is liable to pay VAT as well, as it acts as not just a service provider.
“Amazon has told Karnataka tax officials that the company does not own the goods at any point and neither does it sell on behalf of any seller. It is only providing services—storage, delivery, etc.—for which it charges the seller. So it is not liable to pay the tax,” an unnamed source comments.
”We look forward to an early resolution in order to avoid closing our local warehousing operations in Karnataka and to stay on course for bringing more investments in the state,” said Amazon in a statement about the seizure.
Tax officials have raised doubts over the Fulfillment model. Hundreds of sellers declaring the Amazon warehouse as their “additional place of business” is not compliant with the current tax laws. About 100 merchants have been served notices that ask them “why should we not cancel their additional place of business,” though the process of cancelation will begin only after the authorities have heard them out.
“As per the Karnataka VAT laws, they (Amazon) are acting as commission agents, and hence should discharge their liabilities to the government under the Fulfillment model. We have no issues with regard to the marketplace model,” said Ajay Seth, commissioner of commercial taxes.
This isn’t a problem exclusive to Amazon. Flipkart and Snapdeal run fulfillment centres too. However, Snapdeal has no fulfillment centres in Karnataka, while Flipkart’s leading seller WS Retail that accounts for 85% of their sales has not received a notice. As Krishnan Ganesh, cofounder of GrowthStory, an investment platform, says, ”This is an area that needs urgent attention and clear-cut guidelines by the government. Current laws don’t cater to modern day ecommerce transaction.”
Nor is this the only kind of problem being faced by the ecommerce industry in general. Another tax-related issue results in most marketplaces not delivering to Kerala. As the head of an ecommerce firm remarked, anonymously, “Since the logistics provider is making the delivery and collecting cash-on-deliver, it is considered as a dealer and hence liable to pay VAT in the state.” The company has had to find a work-around by getting the delivery partner to register in Kerala and to settle accounts with the seller directly.
These tax troubles aren’t limited to India. In the past, Amazon has run into trouble in certain states in USA as well as in the UK. “E-commerce transactions have been the biggest headache for any tax authorities across the globe because of the place of supply, who is the dealer, and who will pay the tax,” said Amit Kumar Sarkar, a partner at the financial advisory Grant Thornton India.
With fudgy FDI laws and a blurry line between what is to be paid – VAT or CST – it is evident that the Indian tax norms can’t keep pace with the rapidly growing ecommerce industry. Speculations are rife that the government may modify the Information Technology Act, 2000 to do away with legal obstacles related to ecommerce, in order to boost the fast paced growth of the $2 billion online shopping industry. Until this issue gets cleared, Amazon stands to lose a fair amount of business in a ripe market city of Bangalore.
This comes at a time when Amazon was in the news for having planned to launch a wholesale portal in India. Amidst the entire tax-no tax struggle, one interesting point to note is that positions for tax analysts are now open at Amazon!
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