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In a rapidly growing economy, with a surge in disposable income and increase in the penetration of the internet, the phenomenal rise of e-commerce websites is not surprising. These websites are used by customers for a wide variety of transactions that range from services such as ticket booking to the supply of goods.
However, there continues to be a cloud of uncertainty over the taxation of their activities from the perspective of indirect tax.
Different models While there are several business models followed by the e-commerce companies in India, they can be broadly classified as ‘inventory based model’ or ‘market place model’. In case of the ‘inventory based model’ the company engages in commerce directly. Conversely, in case of the ‘market place model’, the e-commerce company facilitates the provision of e-commerce transactions by acting as platform, in return for a commission from the sellers of the goods/services.
A variant of the ‘market place model’ is the ‘fulfilment model’, wherein, apart from acting as a facilitator, the e-commerce company also provides services such as warehousing, delivery and packing.
From the perspective of an e-commerce company, in case of the ‘inventory based model’, VAT or CST, as the case maybe, is levied on the sale of goods; whereas, in case of the ‘market place model’ service tax is levied on the commission earned. However, on transactions done by an e-commerce company that follows the ‘fulfilment model’, there is a VAT issue at the State level where the warehouse of the e-commerce company is located. The illustration below explains the problem:
Seller and warehouse are within a State : The buyer ‘B’ places an order for certain goods on the portal managed by the e-commerce company ‘E’. E intimates the seller ‘S’, who transfers the goods to the warehouse of E for packing and delivery to B. E receives consideration for the rendition of service from S on which applicable service tax is being paid. When the goods are sold to B, S discharges VAT on the entire consideration. In such a case no issue may arise.
Seller and warehouse are in different States : The buyer ‘B’ places an order for certain goods on the portal managed by the e-commerce company ‘E’. E intimates the seller ‘S’ located in say, State T1, who transfers the goods to the warehouse of E located in say, State T2 for packing and delivery to B. E receives consideration for the rendition of service from S on which applicable service tax is being paid. When the goods are sold to B, S discharges VAT or CST on the entire consideration and deposits the same in the State T1. In such a case, there is a perceived loss of revenue in State T2.
Against this backdrop, it is understood that VAT authorities, especially in the State of Karnataka have sought to tax the e-commerce companies under the definition of ‘dealer’, on the ground that they act as commission agent for the sellers.
On similar lines, even the VAT authorities in Tamil Nadu have issued a press release seeking to tax e-commerce companies on sale of any goods within the State.
GST approach Our present indirect tax legal framework does not afford an immediate solution to this conundrum. However, there is a hope that the introduction of GST may be the panacea to this issue. GST is a tax on the supply of goods and service and shall apply at all stages of the supply chain. In the GST regime, the point of levy will change from ‘sale’ to ‘supply’ and thus per the above illustration, there may be a levy of IGST (sum of Central and State GST) on the goods supplied from State T1 to the warehouse in State T2. On further movement of goods from warehouse, GST will once again be levied as such movement is expected to be covered within the scope of ‘supply’ and recovery of IGST paid in State T1 would be permitted thereby capturing the value addition to tax in State T2.Thus, the revenue leakages in the State T2 will be plugged.
It appears that an immediate resolution to the problems faced by the e-commerce industry is not available in the current regime. However, with the GST legislation on the anvil, a golden opportunity lies before the Indian legislators to find a solution to the industry’s problems.
The writer is a senior director of Deloitte in India
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