The e-commerce sector in India, though in its infancy, is making significant inroads into the mind-share and market-share, especially in retail space, thus connecting a large consumers base (with semi-urban and rural population fervently joining the bandwagon of online shopping) to the sellers.

Given its potential, the sector is attracting substantial investment, which has aided in capacity building, creation of employment opportunities, development of ancillary service sector such as warehousing and logistics (and there are talks of even a revival of the Indian postal services due to this sector), thus contributing positively to the economy. Despite the promise the sector holds, the support being extended by the government to nurture and sustain e-commerce falls short of expectations, especially from the state governments.

Regulatory issues notwithstanding, e-commerce in India is fraught with tax issues on the indirect tax front, more so from the state VAT authorities; given its virtual nature, states fear a revenue-loss. Owing to its unique operational dynamics, merchants listed in the e-commerce sites can reach a larger consumer base from a warehouse in a single state or, in the case of major sellers, from jumbo warehouses located in a few states. In the process, states where the warehouses are located, and from where the sales are made, gain significantly whereas the consuming states do not receive any share of the VAT/CST as VAT/CST are origin-based taxes.

This has led the states where just the consumers are located to resort to demanding taxes on various grounds, like treating the delivery of goods as situs of sale and demanding VAT on such deliveries, treating cash-on-delivery sales as local sales within the state, denial of documentation for movement of goods into the state, holding the goods at check-post till VAT is once again paid at the delivery state, etc. For this purpose, it is often noticed that the logistics companies or the e-commerce companies are treated as agents of the merchants selling the goods. This, however, cannot go on forever and a legal confrontation on these issues looks inevitable.

The states where the jumbo warehouses are located—benefitting from VAT and CST—also seem to have issues. Some of the state governments have started treating the e-commerce companies, operating under the fulfillment services model, not merely as service-providers to the sellers but as ‘agents’ of the sellers on various grounds, including (i) the goods of multiple sellers being stored at the warehouses of the e-commerce companies, (ii) consideration for the sale being collected by such e-commerce companies, etc. The states are, hence, treating these companies as dealers, making them liable for registration, under VAT Laws, for payment of VAT/CST on all sales made from their fulfillment centres on behalf of the principal sellers.

The incessant demands by the VAT authorities across the states has also forced the e-commerce companies to have a second look at setting up central warehouses in business-friendly states. This is another testimonial to the fact that often the taxation structure/tax issues in India dictate the supply-chain/distribution adopted by the companies.

While the e-commerce companies are trying to cope with the tax issues, the onus should also be on the state governments to actively resolve the issues being faced by this sector, without compromising on the compliances required of the dealers making the sales from their state through these e-commerce platforms. The approach should really be in finding constructive solution to the concerns of both sides through proper dialogue, rather than the investigative approach resorted to by revenue authorities of most states, which primarily revolves around search and seizure of goods and warehouses, before any VAT/CST issues are even identified.

Given the myriad issues being faced presently, e-commerce companies are keenly following the developments on the GST front. It is widely expected that GST, which will be a consumption tax, should keep all the states happy and should significantly ease the pains of “doing business in India” from an e-commerce perspective.

Rajeev Dimri

With inputs from Prashanth Bhat, Director, BMR & Associates LLP

The author is Leader, Indirect Tax, BMR & Associates LLP.
Views are personal