The Narendra Modi led Government recently launched the ‘Digital India’ campaign with a view to enable growth that is completely based on digitisation and use of the Internet. The Government has also launched various initiatives and benefits under the ‘Startup India’ campaign throwing a large importance on making India one of the largest base for enabling startups mushroom in India.
While the intent of the Government and particularly Mr. Narendra Modi is clearly visible to make India one of the fastest growing and largest economies of the world, it is important that on-ground the vision of the leader is implemented in spirit. One cannot fulfill the vision unless the people and policies around you make the environment conducive. The leader may have a grand vision to make India shine, grow, propser so on and so forth, but only dialogues and vision statements can’t help. The entire Government mahinery needs to function in tandem with the vision of the leader and implement it in true spirit.
This document aims to highlight some key areas of concern for the e-commerce industry, specifically keeping in mind the indirect tax issues covering VAT, service tax and excise duty.
1. Aggregator Service Model – Much clarity Needed
Various e-commerce companies including the likes of Uber, Makemytrip, Zo Rooms etc are engaged in commercial transactions over the Internet. Customers transact in millions of rupees on these e-platforms where goods (i.e., merchandise) and services (i.e. digital products including travel, tickets, hotels etc) are conveniently bought and sold.
The concept of ‘aggregator service model’ was introduced in 2015 on the basis that service providers that were either not paying service tax because they didn’t cross the threshold limit orwhere the Revenue wasn’t sure if the service tax being paid was actually getting deposited. The aggregator service model intended to cover the web-based companies that were allowing service providers to sell their services using a computer app only in those siutations where the service was provided using the brand name of the website owner.
Though the intention of Revenue at that time was to cover the cab operators like Uber, the defintion of the aggregator service in effect made a lot of other e-commerce players get caught in it as well. Consequently, it wasn’t clear whether the app based service provider was supposed to pay service tax on services or should it have been the obligation of the actual service provider, who anyways might have been paying service taxas independent service provider. Whether aggregator was a new service category or was it just a method to ask a person other than the actual service provider to pay service tax.
For instance in the case of app-based platforms that help customers book hotel rooms using their app, the confusion was regarding who’s responsibility is it to pay service tax – the actual hotel or the app-based service provider, specially in cases where the invoice is sometimes issued by app-based service provider and sometimes by the hotel directly. Typically, the models revolve around how payments åre made by the customers – either to the website (i.e., prepaid) or sometimes pay at the hotels directly (i.e., post paid).
Under the aggregator model the obligation to pay service tax is on the aggregator, but would that still be applicable where the actual service provider is registered under service tax and discharges tax liability on his sales. The intent of the Government is surely not to double tax a single transaction and this provision thereby creates an anomoly.
Separately, the issues regarding determination of the assessable value becomes a challenge as it is not clear if the discounts offered and borne by aggregators should form part of the assessable value. In addition, whether the aggregators would be eligible to claim the benefit of abatement notifications is something that has not been clarified by the Revenue and consequently, the aggregator web-based app companies grapple with.
This also creates confusion on the availment of CENVAT credit because if the app-based service provider is obliged to pay service tax, the actual hotel service provider won’t be allowed to avail CENVAT on his input services.
It is expected this Union Budget should clarify the appropriate tax treatment under the app-based service delivery model along with the eligibility to claim CENVAT credit.
2. Sale of Goods – Who Should Tax – State or Centre or both?
Few months back, the financial dailies were flooded with front page reports on how various State VAT officers are trying to get a pie of revenue from e-commerce players on sale of goods taking place from their warehouses located in those states.
Various e-commerce platforms of the likes of Amazon and Flipkart have set-up their warehouses in various states to faciliate movement of goods quickly. This typically is known as the Fulfilment Centre model, a term coined by Amazon where the vedors ship their goods to be stored in e-commerce companies’ warehouses and those warehouses in turn are shown as additional place of business of the vendors.
The basic premise of having warehouses at critical points/states is simply to enable consumer faster and efficient delivery of goods. These warehouses store the merchandise of vendors that are registered with them and once the customer palces the order on the website, the goods are shipped to them within the same state.
The e-commerce companies simply despatch the goods, whereas the title to the goods gets transferred from the vendor to the customer directly. The invoice for sale of goods is by the vendor and the e-commerce website only collects the money on behalf of the vendor and thereafter, remits the amount after deducting their commission.
Various State Governments (typically Karnataka, Kerala, Delhi, Uttarakhand) are eyeing these transactions as taxable in their respective states as ‘intra-state’ sales subject to VAT. They are intending to classify the e-commerce companies as ‘commission agents engaged in sale of goods on behalf of vendors’ and subject to VAT.
What causes a concern is the fact that the vendors while despatching goods from their respective states have already paid Central Sales Tax (‘CST’) and any subsequent tax on such sales within the state of e-commerce company’s warehouse leads to dual taxation.
In an eventuality of such inter-state transaction being held as local sale, there is no recourse to claiming refund of CST paid to the origin state or for the settlement of the tax paid amongst the states.
It is imperative that the Central Government thorugh appropriate instructions to States clarify on the correct VAT treatment of such trasanctions.
3. Applicability of Excise Duty on allied functions – Suitable Clarifications Needed
E-commerce companies like Amazon, Myntra, Snapdeal are typically engaged in various allied activities such as bar-coding of the merchandise, debundling of goods from wholesale packages to retail packages, sorting, inventorying, labelling etc to make the goods ready for sale.These are value added services provided by e-commerce players to their registered vendors to ensure the packets are delivered on time and in the right condition.
Even this aspect has not been left by Revenue officials and the have started eyeing them from the perspective of excise duty. Section 2(f)(ii) and Section 2(f)(iii) of the Central Excise Act, 1944 defines ‘manufacture’ to include the process of packing, re-packing, alteration of RSP etc on goods that are assessed on MRP based valuation and consequently, the activities of e-commerce companies are being eyed as deemed manufacure.
It is pertinent to note that the Authority for Advance Ruling in Amazon Seller Services Pvt Ltd(AAR/CE/04/2012)had held that these activities do not make the goods any more marketable and the activities of Amazon are purely in the nature of services and not manufacture. Consequently, such services shouldn’t be considered as deemed manufacture subject to excise duty.
It is important that the Finance Minister in this Budget comes out with suitable clarifications specifically on e-commerce transactions to make these transactions outside the ambit of excise duty.
4. Systematic Mechanism To Manage Litigations/Show Cause Notices/Pre-Deposits
Litigations, specially in the indirect tax sphere have been quite trecherous considering there are more than one authority to deal with by the e-commerce companies. As we discussed above, these companies are in a myriad of disputes with Service tax, Central Excise and VAT authorities, thereby making the life of Tax Heads and CFO’s of such companies miserable.
What is critical for the Finance Minister to understand is the clauses of pre-deposit that were introduced in Service tax, Central Excise and Customs litigations and are also present in the state VAT legislations.
The pre-deposit clauses create massive cash flow issues for the new-tech companies specifically in the e-commerce sphere. As per published reports, majority of the demands inititated and adjudicated by the adjudication and first appellate authorities are typically dropped by CESTAT/Tribunals in 80% of the cases.
If such is the fate of demands by lower authorites, there definitely is a need to put in place a strong mechanism to educate the Revenue officers on aspects of law and a sense of maturity towards issuance of show cause notices. It might be also a good idea to put in place a pecuniary limit (such as 15-20 lacs) for any issue that requires a pre-deposit. Also, amounts of interest and penalties should be kept outside the ambit of pre-deposit as that can tremendosuly manage the cash flow issues.
A serious consideration of the above issues is the need of the hour by Ministry of Finance and through this article we hope the Revenue officials are able to appreciate them and make suitable changes in the Finance Act, 2016.
Authored by Nimish Goel, Head of Indirect Taxes and GST at International Business Advisors. Nimish has spent almost 13 years practicing indirect taxes including VAT, Service tax, Excise and Customs. He has worked with BIG4s including EY and KPMG both in India and in Europe. For any queries Nimish can be reached at email@example.com
International Business Advisors (www.ibadvisors.co) is a boutique audit, tax and consulting firm run by ex-BIG4 professionals and working extensively with multinational companies operating in varied sectors including e-commerce, mobile, manufacturing, real-estate and hospitality. IBA operate out of its offices in Delhi, Mumbai and Bangalore.