Taxing times for ecommerce sector

Major players grapple with issues of delays and demands on shipments even as tax authorities keep a keen eye on their business

Updated: May 25, 2016 08:24:22 AM UTC
shipment
Under GST, the state of delivery should lawfully obtain the revenue from the e-commerce sale ( Photo: Shutterstock)

The ecommerce sector appears to be the cynosure of tax and regulatory authorities. Even as the sector comes to term with the recent policy circular emphasising FDI norms, it is simultaneously battling crippling delays and demands on shipments being delivered across the length and breadth of the country. Here is a look at why this is a unique phenomenon that this sector needs to face and conquer in India.

The “USP” of the sector is delivery within quick and committed timelines at reasonable prices leveraging economies of scale. In line with this, deliveries to online shoppers are typically made from regional warehouses in key states with central sales tax being paid to the state from where the goods are despatched. This appears to have left the destination states into which the goods are delivered harbouring a sense of loss of revenue on goods consumed within their state. What started as sporadic demands being raised on “cash-on-delivery sales”, has, in recent times, progressed into a full blown levy of entry tax legislations, being introduced, specifically targeting delivery of goods by online portals. These new found taxes seek to apply themselves on inbound ecommerce shipments meant for delivery to end consumers residing in the state.

Per se, such entry taxes in discriminating against shipments of a particular nature / industry shall go against the basic principle of equality, which is a canon of taxation. Importantly, the framework of the Indian constitution seeks to promote and protect free flow of trade across states and frowns upon any tax that disincentivises such movement.  Despite this, the bandwagon of states that are choosing to tax ecommerce deliveries continues to be on the rise.

Interestingly, the concept of an entry tax which seeks to provide states with an entry barrier for goods made outside the state is, in itself, under challenge as being a violation of the principle of free trade enshrined in the constitution. The validity of entry tax is set to be examined by a nine-member bench of the Supreme Court in July. In this backdrop, specific legislations which additionally seek to discriminate online or ecommerce supplies appear premature. Such judicial scrutiny, however, does not appear to deter destination states from assuming powers that they may technically not possess in legislating these special levies.

Unfortunately, these levies create unwarranted divisions in the manner of taxation based on location of supply, when ironically the ecommerce sector (which has borne the brunt of these levies) aspires to unify the country digitally by enabling cross border access to sellers as well as buyers. What states perhaps fail to consider is that counter measures of a similar nature by every state will only affect business for manufacturers in each state seeking to cater to customers in other states. Further, manufacturers and traders may be forced to frequently re-determine product pricing to factor in these new levies across states.

This trend of special entry taxes on ecommerce shipments has forced some companies to contest such levies as and when they emerge in each state, with others seeking to quietly absorb the additional tax costs or pass it on to shoppers. Either way, this is crippling from the perspective of cost as well as ease of doing business. Arguably the impact would be most felt by startups in this sector as well as individual consumers like us who may be forced to pay higher prices for our purchases, killing a key reason for engaging in the comfort of an online purchase.

The impact is being equally felt by the various players in the sector viz, marketplaces, sellers on such marketplaces and delivery companies who are constantly seeking to discern who among them is statutorily liable to pay and absorb the tax impact. With the laws seeking to apply the levy on any or all of the ecommerce players above, there is apprehension of dual levy, as well as possible commercial battles, with each of these players seeking to contend that a statutory levy imposed on one (player) cannot commercially be passed on to another.

In terms of what is in store, the general expectation is that all forms of entry taxes will be subsumed under GST, with supply of goods being taxed based on their destination. Hence, under GST, the state of delivery should lawfully obtain the revenue from the ecommerce sale and consequently, this issue should fade under GST. The issue shall, however, continue to remain under GST in the event business to consumer supplies of goods is taxed on the basis of the location of the supplier.

In the interim, this potentially short-lived move by states needs to be discouraged. Finally, while states appear anxious to benefit from the ecommerce boom which facilitated the sale of goods worth approximately $12 billion in India during 2015, the question is, in seeking to overreach, will they end up killing the proverbial golden goose?

- By Jayashree Parthasarathy, Partner, BMR & Associates LLP

Views of the authors are personal.

The thoughts and opinions shared here are of the author.

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