Taxman’s sword hangs over e-commerce firms

KR Srivats New Delhi | Updated on November 25, 2017


Marketplace justification may not pass muster with sales tax authorities

E-commerce firms are coming in for a closer look by sales tax authorities. The ‘marketplace’ argument used by these entities to sidestep foreign direct investment norms may not pass muster with tax authorities keen to protect their value-added tax (VAT) revenue.

As a provider of a marketplace, e-commerce firms say that they do not hold ownership titles to products, but only provide a “fulfilment service” by getting a buyer and seller to transact on their platform.

Some e-commerce companies such as Flipkart have moved away from the inventory-based business model to this marketplace model. Flipkart, which owned WS Retail until January 2013, sold it to a group of high net-worth individuals to avoid investigations under the Foreign Exchange Management Act.

Amazon in India is already facing tax challenges and has even taken up this issue at the level of the Prime Minister. State-level tax authorities, especially in Karnataka, contend that these marketplaces should be viewed as trading outlets of e-commerce firms.

They have asked sellers (third-party vendors) not to store their products at the warehouses owned by e-commerce firms. This is because e-commerce companies are not paying VAT on the products sold from such warehouses.

The e-commerce companies contend that they do not have to pay VAT on products sold from their warehouses through their electronic platforms as they follow the ‘marketplace’ model. Ownership of the products, they contend, lies with the third-party vendors, who store their products after approval by state tax authorities.

But the Centre wants the e-commerce firms to pay service tax on the fees (service fee) they earn from the marketplace.

Indirect tax

“Taxation issues around e-commerce firms are still unresolved. The indirect tax (VAT, service tax) outcomes will have far-reaching ramifications on their being compliant with FDI norms and could even lead to the death of e-commerce,” said Sujit Ghosh, Partner at law firm Advaita Legal, speaking to BusinessLine.

So, what would be the fallout on compliance with FDI norms if the taxman were to extract value added tax from them?

An important outcome, say tax experts, would be that e-commerce firms would then be considered to be the owners of the goods and therefore treated as traders, leading to violation of FDI norms on multi-brand retail, if they had any foreign equity holding.

This is because VAT is usually paid by sellers of goods holding ownership rights/title to them. Currently, foreign investment is not allowed in multi-brand retail.

Many e-commerce firms with foreign owners are getting around this norm by contending that they are nor retailing/selling goods, but only providing a marketplace.

Who is funding Flipkart’s massive discounts?

Debabrata Das reports: Monday saw Flipkart’s cash registers ringing. But did the company make money from the discounts or was it funding the discounts? This is the question uppermost in the minds of industry watchers.

A look at the 2013 filings of Flipkart Pvt Ltd, the Singapore-registered holding company for the retailer’s business, reveals that money poured in by private equity firms is fuelling the massive discounts.

The filings show that the entire net worth of the Flipkart Group — a maze of companies ( see info graph) — was eroded by March 31, 2013; its liabilities exceeded its assets by ₹475 crore as on that date. Flipkart, which began commercial operations in 2007, had till 2013 raised around ₹2,000 crore. But this was wiped out. It raised some ₹8,000 crore in two more rounds of funding to stay afloat.

Ernst & Young LLP, which prepared Flipkart’s accounts in December 2013, had pointed out that the balance sheet for fiscal year 2013 would normally indicate “existence of material uncertainty, which may cast significant doubt on the Group’s ability to continue” but the fund-raising is a sign of continued financial and operating support from investors and their confidence in the viability of the group.

Published on October 07, 2014

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