CA K. Jitendra Babu
1. E-Retailing transactions are growing by leaps and bounds, day by day, because of convenience, choice, cost competitiveness and transparency being offered. With increase in volume and value of these transactions, naturally taxman’s eyes are on these transactions, to explore the possibility of levy of VAT or CST as the case may be, and to investigate about possible evasion of tax.
2. Recently, VAT departments in the States of Karnataka and Telangana have raised the issue of taxability of E-Retaling transactions and doubts about possible evasion of tax. It is apprehended that E-Retailing firms may be forced to leave the Country unless and until clear and transparent guidelines are issued in this direction, without any arbitrariness and possibility for different interpretations which will lead to painful, costly and time consuming litigation.
3. Leading E-Commerce Giant Amazon has already indicated that they may leave the State of Karnataka or Even Country, if the tax related arbitrariness hits their operations. This would result in loss of jobs, affects growth of the economy and add to impression in the minds of international community that the tax practices in India are not stable and do not allow them to carry out the business in a predictable manner. Therefore, it is the need of the hour for the State Governments to come out with clear cut and transparent guidelines on E-Retailing transactions.
4. I wish to bring out the broad outlines relating to taxability of E-Retailing transactions from VAT and CST angle under various scenarios and request the professional colleagues to share their views, which will help in framing common understanding and taking up with the authorities for necessary guidelines.
5.Basically, E-Retailers can carry out three types of transactions:
a. Where the E-Retailer acts only as a facilitator, in which case he does not own any materials on his own, but allows the buyer to purchase the materials through his web site, in terms of the agreement between E-Retailer and the Seller who owns the materials. In this case, E-Retailer is purely a commission agent and out of the purview of the VAT or CST Acts. The liability towards VAT or CST in such a case would as under:
i. The taxability to either VAT or CST, depends upon the material movement by seller, as he is required to deliver the materials to the buyer. In case the Seller is required to make delivery of the goods to the buyer situated in the other State, consequent to the order placed by the buyer on the web-site of E-Retailer, then the Seller is required to remit CST on the sale price of goods to the VAT department of the State from the where the materials are moved. For ex., the Seller is in the State of Maharashtra and Buyer is in the State of Kerala. Then the materials are required to be transferred from Maharashtra to Kerala consequent to sale transaction carried out by the buyer on the E-Retailer’s web site. The Seller in the State of Maharashtra is required to remit CST to the VAT department of Maharashtra State.
ii. Alternatively, if the Seller and Buyer are both in the State of Maharashtra, then the material movement will be within the State of Maharashtra and the seller is required to remit VAT to the State of Maharashtra. No liability arises on the E-Retailer, as he does not own the materials and therefore not transferring any property in goods to the buyer.
iii. Material movement decides the nature of levy – If it is inter-state movement, the seller is required to remit CST. In case of intra-state movement, the seller is required to remit VAT. The right to levy VAT or CST accrues to the State wherein the materials are moved.
b. Where the E-Retailer purchases the materials on his own and then re-sells to the buyers, then the liability would be on the E-Retailer for discharge of VAT or CST as the case may be, which is explained hereunder:
i. In case the material movement is within the same State, then the E-Retailer is required to remit VAT on the sale transaction to the VAT department of the State where the materials are located. For ex., If the buyer is in the State of Kerala and places order on the web site of the E-Retailer and if the E-Retailer holds the materials in his godown in the State of Kerala and makes delivery to the buyer, then the E-Retailer is required to remit VAT to the State of Kerala.
ii. In case the material movement is from one State to another State, then the E-Retailer is required to remit CST to the State from where the material movement is initiated on account of sale transaction. For ex., a Buyer in Kerala places order on web-site of the E-Retailer. Consequently, the E-Retailer who holds stock of the materials in the State of Karnataka is required to make delivery of the goods to the buyer in the State of Kerala. Since inter-state movement is involved, the seller is required to remit CST to the State of Karnataka.
ii. The crux of the issue is – liability for VAT or CST arises in the State from where the materials are delivered. If the E-Retailer holds his materials in the State of Karnataka, then whether the buyer is in the State of Karnataka or Kerala, the liability to discharge VAT or CST on the part of E-Retailer accrues to the State of Karnataka.
iv. However, if the E-Retailer holds materials in the State of Kerala also, and delivers the materials to the buyer in the State of Kerala, then the liability arises in the State of Kerala and E-Retailer is required to remit VAT to the State of Kerala. Even though the web-site related infrastructure of the E-Retailer is located in the State of Karnataka, no liability arises in the State of Karnataka, as there is no material movement from the State of Kerala.
c. Third alternative is – Where the E-Retailer holds the materials of the Seller as an agent in his custody. In such a case, the E-Retailer is an agent of the Seller and discharges the liability on behalf of the Seller. Here again, the material movement determines the taxability of the transaction to VAT or CST.
i. The E-Retailer holds the materials of the Seller in his godown in the State of Karnataka. Then, he would be required to move the materials either to other States or within the State of Karnataka, based on the location of the buyer.
ii. If the buyer is located in the State of Karnataka, then the material movement will be within the State of Karnataka and E-Retailer is required to remit VAT to the State of Karnataka, on behalf of the Seller.
iii. If the buyer is located in the State of Kerala, then the material movement is to be done from the State of Karnataka to Kerala, which becomes a CST sale and E-Retailer is required to remit CST to the State of Karnataka, on behalf of the Seller.
d. The basic issue that is to be understood in the subject is – State where the materials are lying and from where the movement is initiated for delivery to the buyer, whether inter-state or intra-state is competent to levy VAT or CST, depending upon the movement. Location of E-Retailer in a State does not automatically casts obligation on him or empower the State to levy VAT or CST, if the material is lying in other State and movement on account of sale is from the that other State.
e. If the State VAT authorities are under the impression that location of E-Retailer in their casts liability on him, irrespective of the location of the materials and their movement, guidelines or instruction under such impression would result in disputes which would consume lot of time, energy and money of the E-Retailers and disturb their business operations.
6. I have tried to explain the taxability of all possible transactions in case of E-Retailing. All professional colleagues, trade and industry are requested to share their views and take up with the authorities at their end, so that guidelines issued by the department would be clear and transparent and avoid unwanted and painful litigation atleast to some extent.
As mentioned by one of the reader, the issue is ‘E-Retailer’ is not considering himself as a ‘Dealer’ even in case Goods are in his Facilitation Centers and he handles the logistics related activities.
While there exists points of defence on either side, it would be good for the country if a consistent approach is followed by VAT Departments of all the States ASAP.
This would ensure, that there is no adverse impact on E-Tailing Companies and country as a whole. India has lost heavily in it’s brand image post issues in case of Vodafone & Shell.
Dear Sir,
Fully agree with you on the point of tax for VAT or CST. This is really good article to read with.
I have one query with respect to this e-retailers. What happens that generally they supplies material on returnable basis (like if you do not satisfied with the product which is supplied with by dealer who is registered on their website,they can return the said goods within certain period of time say within 7 days.)Now in general all the products which are sold on E-retailer website is of FMCG in nature.Suppose one end user has put order in November end. The order has been dispatched in November itself say on 29th November. Now The end user return the same material say on 2nd December, then what to do? How to calculate tax payable as the end user has send the product back it is without any document. Please throw some light on it.
Thanks in advance.!!
The Status of E-retailers is at a point that was similar to the status of Works Contractors till the amendment to the Constitution including Works Contracts as Deemed Sale. In that scenario there was no clarity on tax on works contracts for almost three decades.
The need of the hour therefore is immediate amendment to the Constitution for ushering in GST.
Subrata
The solution seems to be GST implementation asap. Why could a strong government at the centre not explore initiating this implementation in the coming financial year for e commerce business. E Comm is better equipped to handle this change.Why should you wait till 2016 for this sector. Both the objectives would be achieved.
Ramjiyahoo can also freely roam around anywhere.
Dear Sir, one confusion being raised by Commercial Tax Authorities in case of e-tailers is accepting money on behalf of traders; if the E-tailer only facilitates the transaction and does nor actually deal in goods, like in the case of amazon but the money goes to amazon when the consumer places an order on the website the money would be received by amazon and later on remitted to the seller; the sale Invoice is also raised by Amazon on the consumer; but the related E-sugam or Delivery note is raised by the concerned seller, Amazon may be liable to be assessed as a dealer, as per state VAT laws. E-tailers do not appear to have paid enough attention to the nitty gritties of law and procedures and end up attracting litigation.
How about purchase and salsalsa of ebook. Example when I order the ebook I lives/ stays in chennai. I placed the order thru flipkart and the seller is from Mumbai. But when my order and payment accepted the ebook starts downloading inti my android mobile and that time I am in train reaching kerala . Next day I am flying to Mumbai . In thus case does state vat will apply or cst. And on top these marginal tax revenue and harassment will kill the innovative business and service
Sir,
The article is really in depth analysis of provisions of law and practise. A brilliant article.
You may elaborate further about following issues, if possible
IF E retailers floats small entities having turnover below thresh-hold limit of registration and effects sales through them.
If the seller does not pay tax then to which extent liability of E retailer for such unpaid tax
Ajay Bonde