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  1. Flipkart, Snapdeal, others in line of fire as e-trade tax near top of states’ Budget wish list

Flipkart, Snapdeal, others in line of fire as e-trade tax near top of states’ Budget wish list

Online retailers like Flipkart, Snapdeal and Lenskart have come in states’ line of fire with some of them urging Union finance minister ...

By: | New Delhi | Updated: February 12, 2015 9:53 AM
Indian e-commerce, Ecommerce news, Ecommerce India, Ecommerce avenues

A consumer (other than a registered dealer) based in Bhopal, for instance, could buy a laptop from a dealer in his city but stored by Flipkart in its Bengaluru warehouse and the tax revenue goes to Karnataka.

Online retailers like Flipkart, Snapdeal and Lenskart have come in states’ line of fire with some of them urging Union finance minister Arun Jaitley to impose higher taxes to discourage web-based shopping that takes place cutting across state borders.

A host of states, including Madhya Pradesh and Kerala, have found their VAT revenue taking a hit as consumers resort to online purchases, which allow e-tailers to shift the tax payment to states where their warehouses are located.

A consumer (other than a registered dealer) based in Bhopal, for instance, could buy a laptop from a dealer in his city but stored by Flipkart in its Bengaluru warehouse and the tax revenue goes to Karnataka. The states, especially those in which major e-tailers have no warehouses, therefore want the “sale” of goods from e-tailers’ warehouses to be sharply increased, treating them as interstate sales in case the warehouse is not situated in the consumer’s state.

Kerala has demanded that the rate to be hiked to 14.5%, even as VAT on most goods of high currency like mobile phones, computers, clothes and consumer electronics is 5%. The tax increase will require an amendment in the Central Sales Tax Act.

E-tailers achieve tax efficiency by setting up warehouses in a few states where high-demand items like consumer electronics and clothes are taxed less and get them delivered to buyers in another state.

The move by states against online commerce comes against the backdrop of the Karnataka government’s recent demand on Amazon to pay VAT on the goods sold from its warehouse in the state rather than third-party merchants who use Amazon platform to sell goods paying.

Flipkart, snapdeal.com, yebhi.com, myntra.com, jabong.com, firstcry.com and lenskart.com are among the major players in India’s $12-billion e-commerce industry growing at about 34% a year.

Etrade-demand

As per Kerala finance minister KM Mani’s proposal, the tax on “interstate sale” made by e-tailers to end consumers should be sharply higher than what would apply to an interstate sale by a manufacturer or stockist to a registered dealer in the consuming/importing state.

At the moment, e-tailers and conventional dealers who sell to a registered dealer in another state only need to pay 2% central sales tax on the transaction, the proceeds of which go to the exporting state.

End consumers fall in the category of ‘unregistered dealers’ under the CST Act. If the sale made by an online retailer is to an unregistered dealer in the importing state, the applicable tax is the VAT rate applicable on the commodity in the exporting state, which also goes to the exporting state.

Madhya Pradesh finance minister Jayant Malaiya, on the other hand, told Jaitley that the “taxation system should be readjusted to tap the opportunities offered by e-tailing”. Malaiya wants clarity on when a sale can be deemed to have taken place so that tax issues in the highly dynamic industry are settled. Experts too agree that more clarity is required on what constitutes a taxable event in online trading.

States have also made a slew of other tax proposals to Jaitley including exemption from rigorous transfer pricing audits on state power utilities having associates in special economic zones, import tariff protection for locally significant products and personal income tax breaks.

Gujarat finance minister Saurabhbhai Patel told Jaitley that the state has separate companies for power generation, transmission and distribution, which allocate costs among themselves so that surpluses could be reinvested. However, the Income Tax Act insists that transactions within group companies have to be at an arm’s length if some of those units are within special economic zones. This, according to Gujarat, will prevent any reallocation of costs and affect its record of providing uniform power tariff throughout the state. Gujarat therefore wants an exemption to state power utilities from transfer pricing rules in the absence of which it may be constrained to re-bundle all the utilities into a single entity.

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