Understanding E-Commerce transactions-Amazon v/s Tax Authorities in Karnataka

Mridul Agarwal

Flipkart, Snapdeal, Amazon!! Do they sound familiar? Of course they do. There may hardly be any person who has not heard of these E-Commerce behemoths. E-Commerce is the in thing. Anything even remotely related to E-Commerce will sell like hot potatoes. With million dollar valuations and surplus funds, these giants are  here to stay. Everyone, right from Venture Capital funds to the ordinary customers, are going gaga over them. However, there is one entity which does not seem to be too enthused with these companies. No prizes for guessing who they are, The Tax Authorities!!

Recently, Amazon was in the news for all the wrong reasons. It is common knowledge how Amazon ran afoul of the Karnataka Commercial Taxes Department. Let us understand what the issue is all about.

For an e-commerce company like Amazon, Snapdeal or Flipkart sales takes place in two forms. In the most basic form these companies offer a platform where the buyer meets the seller on the website after he chooses a product. This is called the Marketplace model. Sellers are merchants who showcase their products on the website of these e-commerce companies. If the product and its price meets the buyers’ requirement a sales transaction is initiated. In such a transaction the website acts only as a facilitator and gets a commission for providing the service. The e-commerce company has to pay a service tax on the commission it has collected. There is no question of sales tax or value added tax in such a transaction. Sales Tax/VAT is collected by the seller directly from the customers itself. The Invoice too is raised in the name of the seller and not Amazon. Amazon merely acts as a mediator.

Nowadays E-commerce companies no longer provide only a platform to sell. They have developed ways to predict customer preferences and interpret which products will be in demand. To save on time and logistics cost and to earn a little extra money, E-commerce companies store goods they feel will be in demand in the market. This type of transaction is the bone of contention between Amazon India and Karnataka’s tax authority.

These goods are stored at a warehouse by Amazon known as a ‘Fulfilment centre’. This arrangement serves to ‘fulfil’ the demand of the customers at the fastest possible time. Amazon opened its warehouse in Hoskote taluk of Bangalore Rural district in January 2014. Under this model, the dealers/sellers register the Amazon warehouse as their additional place of business, also called branch, with VAT authorities. The Commercial Taxes department accepted this initially, but later questioned the business model.

Under the Karnataka VAT Act, 2003 every registered dealer is supposed to get his business premises registered with the authorities along with any other additional places of doing business popularly known as branch. The dealer has to pay VAT on transactions carried out at not only the head office but also at the additional place of business.

In the instant case, the dealers were stocking their products at Amazon’s warehouse but had not registered this as an additional place of business in their registration certificate. Hence, the department proceeded to cancel the registration of such dealers.

Further, the Commercial Taxes Department asked Amazon to pay VAT on behalf of sellers as it was acting as a commission agent. The Department was of the view that that Amazon is liable to pay the tax as the ownership of the good is transferred to the e-commerce company till they sell it. It is something similar to a shopkeeper stocking goods with a buyback clause with the manufacturer that they will give the product back if it remains unsold. Logic behind the tax authorities demanding tax could be that since Amazon India stores products of more than one kind and that too not in a random fashion but there is some science behind the stockings, there is an element of value-add. Taxmen might not be viewing it as a simple case of providing service.

Amazon contented that it is only a service provider providing services of storage, delivery and collection of money for the seller and at no point does it own or sell the product. Subsequently, Amazon collects the money from the sale and passes on the amount to the merchant after deducting its commission. The dealer remits VAT to the government. Amazon further contended that the stand of the department would lead to Amazon violating FDI rules in the country which prohibits FDI in retail.

The Karnataka Government is now in the process of amending the State VAT law to bring it in line with modern times and include a reference to E-Commerce transactions. This mess needs to be sorted out else it is not far when Karnataka would see Industries shifting their base to other states.