Budget expectations from the ecommerce sector

Existing regulations not keeping pace with the advances made by the sector should make way

Updated: Jan 25, 2016 09:07:50 AM UTC
ecommerce
A worker of an Indian e-commerce company makes a call to a customer before delivering a packet in Ahmedabad, India ( Photo: Amit Dave / Reuters)

As the Indian ecommerce sector blossoms from infancy to maturity, there is hope and expectation that some of the tax and regulatory issues plaguing the sector stand mitigated through a robust and futuristic tax policy that understands and addresses them. The sector is grappling with pre-dated laws not flexible enough to adjust to its nuanced and futuristic requirements, both at the central as well as state legislation level. In the backdrop of budget exercises already underway at the central government level and around the corner in most states, here is a look at some key indirect tax expectations of this sector.

The market place model currently in vogue in online retail (where a host of vendors list and sell products from the online portal of the marketplace) has possibly been at the forefront of tax battles at the central and state level.

From a Union Budget exercise perspective, a historic issue that has to date eluded comprehensive resolution is the increasing array of value-added services provided by a marketplace to sellers listed on its portal being treated as ‘manufacture’ by virtue of a deeming fiction under the central excise law.  Such value-added services typically include de-bundling, bundling, sorting, inventorying, labelling, wrapping, product inspection, including in recent times, repairs and refurbishment of the products sold through the portal to enable better customer experience. Notwithstanding the fact that such activities are performed on products already taxed under excise laws and in a ready and marketable state, sporadic excise demands continue with no clear clarification to the contrary forthcoming. The sector is hopeful of a clear policy guideline in this regard.

The evolution of new transaction models in this sector such as “cash on delivery” sales and “sale on approval / trial” basis has rekindled the age-old debate of “intra-state” sale vs “interstate” sale with both the supplying state and receiving state vying for tax collection on the sale. In this backdrop, an advisory from the central government to state governments under the auspices of the Central Sales Tax Act, 1956, or through a department of revenue advisory referring to specific models of ecommerce sales to confirm the tax position applicable or even an accelerated and special dispute resolution mechanism under the central sales tax law to negate one of the two levies should provide the necessary succor.

At the state government level, issues are manifold and range from substantive issues of the marketplace (incorrectly) being sought to be taxed in respect of all sales effected by vendors through its portal to procedural issues of refusal to enable registration of multiple vendors at the marketplace warehouse or refusal of VAT laws to recognise digital invoicing to emerging issues of manner of taxation of instruments such as e-wallets and redemption vouchers.  Coupled with this is the threat of some states legislating special taxing mechanisms such as VAT deduction at source on collections made by marketplace companies which would at best result in unwarranted litigation around its legitimacy. Many of these issues are a result of the law and its administrators not appreciating the mechanics of emerging models and existing regulations not keeping pace with the advances made by this sector.

Another key challenge in seeking a resolution to these issues is that businesses need to approach multiple states seeking a uniform law which apart from being time-consuming hinges on the discretion of each state administration. The sector is hopeful that the centre would counsel states against unique and specific levies (in the form of TDS or otherwise) as well as provide required guidance on these technical matters through a comprehensive policy guideline.

Another key challenge for etailers is the diverse VAT rates for products across states, including diverse local levies as well as documentary requirement on delivery of goods states. This often causes diversion of trade including a constant relook by ecommerce vendors at their supply chain and distribution model with the sole objective of mitigating tax costs embedded therein.  The need of the hour is also in imposing restraint on local bodies in assuming jurisdiction to tax goods that merely enter their jurisdiction for purpose of delivery to end users or individual consumers. Unless this issue is effectively addressed under the current law, the worry is that the same could continue and further debilitate industry under the imminent goods and services tax regime as well.

The sector while being mindful of the fact that a resolution in state and local body matters requires cooperation across administrations is hopeful of an integrated approach that could be adopted by the centre in conjunction with states and local bodies to ensure that a comprehensive tax and regulatory policy is uniformly interpreted and implemented for facilitating the growth of the ecommerce sector in the country. The need of the hour is perhaps a holistic policy with an apex regulatory body that could oversee the implementation of a conducive environment for this sector to thrive and flourish. Till such time, the sector would continue to hope as it does for these issues to be individually addressed by each of the states and the central government under their respective legislations.

- By Jayashree Parthasarathy, Partner, BMR & Associates LLP. The views of the author are personal

The thoughts and opinions shared here are of the author.

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