In response to the previous post “Is Karnataka Government hitting NASSCOM through E Commerce taxation?”, the following comment has been received from Mr G.D, Thakur, Assistant Excise and Taxation Commissioner, Hyderabad. Since the response is exhaustive, it has been published here as an independent post. We thank Mr Thakur and also invite others to provide such useful content for publication.
E-Commerce Taxation Issue:
The e-commerce is a way of doing business only distinct from traditional methods of business.The taxation is not different to the e-commerce than the traditional business.Rather it is more convenient to the Taxing Authorities to collect tax from the E-Commerce Business than the traditional business.The e-commerce turnovers and classification of goods for tax schedules is available on a system software than the traditional business which is a mixed maintenance of accounts containing several issues on which the present day taxing authorities are spending their whole time.
In the e-commerce the business turnover,which cannot be suppressed or misappropriated and item schedules can be managed very easily and accordingly the actual tax liability can be worked out on the same system software and the tax payments can be made online into the Govt Treasuries instantly.
The present system of the e-commerce is engineered on the Sales and Purchase Agreements with the online sellers and buyers ,which decides the Point of Vat Incidence and collection and further depositing with the respective Governments.Whatever the Agreements which I have gone through,it is reflected as the seller and buyers other than the Online Market Places[ Viz Flipcart,Snap Deal].The e-commerce majors treat their platforms as the Online Market Place only and they have designed their Sale and Purchase Agreements ,which puts the Liability to collect VAT on the online sellers only.The e-commerce majors charges some market fees,facility charges and commission on the sale value of the products traded through their Platform from the online sellers registered with their online platform[ viz flipcart or the snapdeal].
In nut shell the e-commerce present scenario ,which appears to me:
1.The E-commerce companies calls the online sellers and register them .They register both types of dealers registered with the State VAT departments and unregistered dealers also.Having TIN is not mandatory for them in all cases.
2. Under the VAT regimes ,the tax is always collected by the seller only i.e.the seller state viz the Sale Invoice Issuing State.The VAT will be collected by the state issuing invoice and charging VAT thereon.
3.Under the VAT ,s basic principles are uniform throughout the country.The e-commerce revenue is being collected by the selling states only and the consuming states definitely loosing their Tax Revenues.In e-commerce it is a golden chance for those states to attract the e-commerce majors for doing the neat and clean business.The general approach of the E-Commerce majors is to effect supplies from the vicinity of the consumers to bring down the logistics charges.
4.The Value addition chain is depleted by the e-commerce.As all the chain of distribution from the distributor,sub distributor,dealership,wholeseller and the retailer chain is totally absent, and this was the need of the traditional business.The e-commerce do not require this chain mechanism and the ultimate gainer is the end customers.The online business will bring down the market of black money as the e-commerce business is totally through the Banks and other online Pay portals which are easy to track down and regulate than the cash money flow.
5.In the e-commerce only three trading entities are exiting.1. E-commerce Shopping Platforms 2. Online sellers 3.Online Buyers[ mostly are end customers]
6.The Ecommerce major stress upon to shift the onus of VAT Collection and its deposit on the online sellers and to be paid by the end customers only.
7.The e-commerce majors claims to charge Commission of certain percentage of the sale value of the goods sold through their platform and some facility and market charges from the online sellers.If this commission or incidental turnover part is inclusive in the sale price decided by the online sellers,then the liability of the e-commerce majors to pay VAT on the value addition nullifies.
8.The commission or the incidental charges received by the E-commerce majors are the component of the sale value ,which is arrived at by the online sellers after determining all the charges in addition to the purchase price of the said commodity.The sample agreements as being followed by these e-commerce majors shows that the commission is charged @ of certain percentage of the sale price from the online sellers,on which VAT is inclusive by the Online seller.
9.The VAT is paid by the seller on the price,which includes the basic purchase price,his profit margin,incidental charges and commission paid to the E-commerce major or packing or any other logistics charges.The state government ,when received all the due amount of VAT including the component of turnover involved paid to the –Ecommerce majors, no other VAT liability arises on the E-Commerce Major.This is based on the Terms and Conditions of the Sample Agreement signed by a e-commerce major with the Online seller.The sale price when decided at the point of the seller and the goods are directly transferred to the end-customer ,the VAT applies on the sale value.If this sale value is determined after summing up all the prices involved [ basic procurement price of the item +incidental charges incurred by the seller +charges paid to the packing and storage + charges paid to the E-commerce majors as a commission or in any form for making the item marketable and transportation and handling charges]and VAT is paid on this turnover to the respective state government,and the goods are sold to the end customer,then no other VAT liability arises on the E-Commerce Major[ viz. FLIPCART or SNAPDEAL].For the services provided by them ,they may be accountable for any service taxes if their service qualifies that liability,but not VAT.
10.In otherwise ,if the state authorities want to collect tax from the e-commerce majors ,that is restricted to the ‘Component of Value Addition Part Only’.When this value addition part turnover is already suffered VAT by the online seller to online buyer,then there lefts no turnover with the E-Commerce major to pay any value addition VAT.
11.However,the responsibility of the maintenance of the details Accounts of the online sale and purchase,online sellers to the state govt or online access for exercising administrative control over the online sellers,is must if the proper VAT realization is to be achieved by the state governments.
12. Therefore E-commerce is not difficult to tax.Rather is is very convenient to tax provided our taxing authorities steps along with the technology .It will prove a boon to the technology updated states and will certainly adv-affect the tax collections of those states who will lag behind in welcoming this e-commerce.
13.The e-commerce is a neat and clean ,and environmental friendly business and makes available the commodities at the doorstep of consumers at very cheap rates.
14.This documents is based on the typical online sale and purchase agreement.For any e-sales business,the cyber contract as mutually signed between the contracting partners in lawful obligation to the Indian Contract Act 1872 as amended on date in India and as per the International treaties on trades and business to which India is party ,are the determining factors to decide the incidence of VAT.
15.There is strong need to familiarize the State Taxation Machinery about the e-taxation and to address their apprehensions about the mis-conceptions.The E-commerce will increase the VAT revenues with ease of doing business for the entire society.
16.The e-commerce majors should not apprehend about the clarity of Taxation Laws .The law is already explicit.The VAT s basic fundamentals like incidence of taxation ,and definitions and sales concept are uniform throughout the country. The federal structure of VAT and Ecommerce is based on the foundations of the CST Act -1956, the Sales of Goods Act-1930,The Indian Contract Act-1872 and the IT Act-2000/2008 (e-commerce).
[The views expressed are my own ]
G.D.Thakur-Assistant Excise and Taxation Commissioner
The E Commerce platform works as an agent of both the seller and the buyer and recovers a service charge as a facilitator which is for convenience recovered from the seller from the proceeds. Unless the market place owner buys from the seller and re-sells it under his own invoice, he is neither the buyer nor the seller. At best the service charge levied can be subjected to the service tax though I prefer it to be waived. The State Government should not intervene and try to recover a “Withholding tax” as Karnataka Government appears to be aiming at.
Also from the technical perspective, this requires a change of the software process handling the payment and introduces a complication. We should remember that there are other service intermediaries such as the courier or the payment gateway and each one of them gets their share. These may also be directly distributed from the sale proceeds and are income of each of these agencies and are subject to taxation in their respective states. For convenience, the market place may maintain an account and credit the entire sale proceeds to one account and make on account payments from such an account. Different companies may adopt different practices.
We also need to recognize that the market place operates in “Cyber Space” and the buyer and the seller are residents of different states . ITA 2008 has a means of defining where the contract is concluded and accordingly the location of the “Sale” has to be determined.
If a seller is from Delhi, there is no need for him to pay tax in Karnataka. (Any inequalities between predominantly selling states and predominantly buying states is being addressed in the GST scheme which we expect to be operative in the next year.
Karnataka Government is therefore harassing the E Commerce players just because they have chosen to open their head office in this State Even where there is a ware house, the correct interpretation is that the ware house is rented to the seller to enable efficient distribution. Any other interpretation is convoluted and mischievous.
Karnataka Government made the same mistake in respect of “Aggregators” of Taxi service and failed to recognize “Aggregation” as a “Service”. Though the Ubers and Olas have accepted this for the time being, this is a a dangerous precedent. If the same principle is extended, “Make My Trip” will require air line operating license before booking airline tickets and Book My Show would be liable for the entertainment tax payable for the movie.
I hope people in the Government donot think of E Commerce only as a milch cow and try to extract as much of money as possible. They should look at the overall impact on the economy that the decisions leave. At present it appears that the Government is unfriendly to E-Commerce Business and is driving businessmen out of the State. If this is not checked, E-Business in Bengaluru including the “Start Up Business” will dry up.
I wish some official from the Karnataka Commercial Taxes department responds to this.
P.S: Kindly read this along with the earlier post : “Is Karnataka Government hitting NASSCOM through E Commerce taxation?