How tax query to Amazon opens a Pandora’s box for ecommerce in India

Tax authorities in Bangalore, the capital of Karnataka state, are looking into why Amazon India does not pay value-added taxes – as required under the VAT Act, 2003 – on goods stored in its warehouses. The investigation was first reported by Deccan Herald late last month. Now the matter has escalated. The Enforcement Directorate has issued notices to a number of vendors and stopped the sale of their products from Amazon’s warehouses, Mint reports. VAT, or value-added tax, is a multi-point, destination based system of taxation. At each stage of transaction in the production/distribution chain, taxes will be levied on the value addition – ie the increase in the value of goods and services at each stage of production or transfer of goods and services. According to Indian law, state governments, through their taxation departments, levy and collect VAT in their states. The central government is only a facilitator in the process. Seems like the effects of slapping VAT on Amazon are surfacing. A book I ordered on August 30 has been long delayed, and I got an email from Amazon about its inability to deliver another book ordered on September 4 – this had never happened earlier.

Double trouble Indian restrictions on foreign direct investment (FDI) in ecommerce prevents companies like Amazon from owning inventory in India and selling it directly. To get around this, Amazon adopted a marketplace model in India. Instead of selling its own products, it lets third-party vendors sell their products through Amazon and collects a commission from them. This proved to be a huge success for the company, and all the major Indian ecommerce sites like Flipkart, Snapdeal, and Jabong have also been doing the same ever since Amazon entered India last year. In Karnataka, the taxman maintains that Amazon is liable to pay value-added tax on sales ‘Fulfilled by Amazon’, because it acts as a brick-and-mortar retailer by storing products from various producers and merchants in its warehouses. Amazon’s position is that it should only pay a service tax on the commissions because it is a channel, as it does not buy and sell the products. According to the Indian federal system, sales tax and VAT fall under the state jurisdiction. So, Amazon’s tax woes have the potential to snowball into a scrutiny of the online marketplace model not just in Karnataka, but in state after state, each with its own sales and value-added tax laws. “Other states too can start a similar drive like Karnataka – that’s because there is no clarity on who is liable for what when it comes to ecommerce. If this is not sorted out, every ecommerce player who has a marketplace model in place, including (homegrown market leader) Flipkart, will be scrambling to find a way out… There is a similar kind of issue in the US as well. The federal law is different in the different states, and each state has its own interpretation of what is ecommerce,” Ashish Jhalani, founder of etailing India, explains to Tech in Asia. Also the co-founder and CEO of US-based US-based MySolitaire, Jhalani has worked as a retail expert for Kurt Salmon in its New York office after his graduation from Stern School of Business, New York University. “Indian laws haven’t kept pace with the evolution of ecommerce. Amazon should be seen as a service provider as it doesn’t own the inventory that sells on its site in India. Ultimately the retailers who own the inventory are liable to pay the VAT. If Amazon is forced to pay as well, that would be double taxation,” says Jhalani. According to Amazon, the three huge warehouses it has set up around Bangalore are ‘additional places of business’ for the vendors who sell their products through the site – and not Amazon retail outlets. Tax authorities are not convinced that the warehouses fulfil what is meant by ‘additional places of business’ under the VAT Act. Amazon expansion put on hold Enthused by its success in India and the country’s ecommerce boom, Amazon recently announced a whopping US$2 billion investment – a day after its main local rival Flipkart raised a US$1 billion round of funding. A chunk of that investment was meant for Karnataka, where Amazon had plans for more warehouses, but that appears to be on hold for now. See: Amazon douses Flipkart funding buzz with $2 billion fresh investment in India “We understand this to be a case where the laws have not kept pace with the new-age online business models that enable a faster, convenient and nationwide access to customers for sellers, especially small and medium businesses, at significantly low costs. We look forward to an early resolution in order to avoid closing our local warehousing operations in Karnataka and to stay on course for bringing more investments in the state,” an Amazon spokesperson said in a statement. In July, Amazon had announced its plans to open five more fulfillment centers (FCs) in Delhi, Chennai, Jaipur, Ahmedabad, and Tauru (outskirts of Gurgaon). These would come in addition to its existing fulfillment centers on the outskirts of Mumbai and Bangalore. With these fulfillment centers, Amazons offers the thousands of sellers on its marketplace state-of-the-art warehousing systems and processes to stock and store millions of products of all sizes across several categories. For customers, these fulfillment centers are vital if they want immediate shipment through Amazon’s next-day and same-day guaranteed delivery services. Amazon plays a pivotal role in India’s distribution of smartphones and other electronic goods. This month, Microsoft made the entire range of its Interactive Entertainment Business (IEB) portfolio – Xbox One, Xbox 360, Kinect, Xbox Live, Xbox Accessories and all Microsoft-published Xbox game titles – available in India exclusively on Amazon. Micromax Canvas A1, one of the three Google Android One smartphones released in India this week, is sold exclusively on the Amazon India site. Ecommerce needs fresh guidelines A compromise may be in the works on the tax issue. Bangalore is the country’s main tech hub and the local authorities don’t want the wrong message to go out. “There have been certain issues flagged to us, and we are trying to sort them out. Until then, we have asked the Commercial Taxes department to review the matter on cancelling the ‘branch certificates’ issued to dealers (storing goods in Amazon warehouses),” ISN Prasad, principal secretary of the Karnataka state finance department, told the Economic Times. Jhalani points out, however, that it is the central government that should sort this out. “Eventually the Indian central government should set up the guidelines for all the states. There has to be clarity on the definition of ecommerce, and probably, reform the regulations regarding this.” A number of foreign companies wanting to invest in India have got mired in tax and regulatory issues, from global telco Vodafone, which is awaiting a tax ruling, to oil and gas behemoth BP, which has put billions of dollars of investment on hold till the government comes out with a gas pricing policy. There were high hopes that the new Narendra Modi government, which came to power earlier this year, would remove hurdles in doing business in India, to attract investments. But this is yet to translate into action. The annual budget had been expected to allow foreign direct investment in ecommerce, but the government backed off in the end following representations from local players. In spite of that, ecommerce has enjoyed a merry ride, and investments have been pouring in. But now the honeymoon may be over.