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E-commerce in India: Emerging VAT issues and evolving VAT laws

19 Nov 2015
Electronic commerce or e-commerce enables a business or individual consumer to conduct business (i.e. supply goods or services) using an electronic network such as the internet. E-commerce platforms typically enable business to business, business to consumer and consumer to consumer supplies of goods and services. E-commerce has allowed businesses to establish a market presence, or to enhance their existing market presence, by providing greater reach and a more efficient distribution chain for products or services. While the sector has witnessed unprecedented growth in India in the recent past, mainly due to increasing technology absorption like any nascent industry, the sector has had its fair share of issues on the taxation front. An interesting outcome of this in the Indian context is possibly a forced evolution of the country’s traditional tax laws to meet the demands of this futuristic sector. Taxand India examines the taxation of supplies of goods under a marketplace model including how the e-commerce industry as well as the country’s tax and regulatory policy seem to be developing to address each other’s requirements.

India’s foreign direct investment (‘FDI policy’) on the e-commerce sector restricts FDI in companies engaged in multi-brand retail trading in goods, typically referred to as B2C supplies. This restriction has resulted in many global players adapting to a “marketplace” model that serves as a portal for vendors and customers to connect and contract for sale/ purchase of goods.  The marketplace itself does not buy or sell goods listed on the portal. In addition to making available an online portal, value added services, in the nature of warehousing, dispatch, delivery of goods and collection of sale price, are extended by the marketplace to vendors listed on their portal to enable “fulfilment” of the orders received on the portal.  A fine line of distinction between such fulfilment services typically provided for a service fee (sometimes referred to as a commission) vis-a-vis a commission agent who is treated as a “dealer” in goods has resulted in a massive tussle between e-commerce marketplaces and State Governments with respect to the taxation of supplies. 

The significance of this dispute lies in the fact that, in India, provision of services attracts service tax levied by the Central Government, whereas the sale of goods attracts a VAT that is levied by State Governments in India. The debate therefore is whether the marketplace should pay service tax on its service fee or in fact pay VAT on the value of sales made through its portal. 

The insinuation of an agency relationship between the marketplace and vendors selling on the marketplace or of sale by the marketplace does not augur well from an FDI regulation perspective as the same could pre-suppose retail sales by the marketplace in the capacity of an ‘agent’.  This issue is interestingly poised with different views/ approaches being adopted by different states.  A popular approach till date has been for states to direct marketplaces to furnish detailed information returns capturing all sales enabled through the portal with a view to confirm/ ensure VAT payment on all such sales by vendors selling through the e-commerce portals.  Either way, it is believed that Indian regulatory policy/ state VAT laws would need to soon evolve to holistically address this issue.  A logical next step may be for FDI relaxation to pave the way for online retail by the marketplaces through an inventory or buy-sell model putting an end to this issue from a VAT perspective.

A key practical challenge in the implementation of the marketplace fulfilment model is that Indian VAT laws have not kept pace with the needs and nuances of the sector.  VAT laws across states typically require every warehouse where goods of a seller are stocked to be registered.  While registration of multiple vendors has generally been possible, historically, physically demarcated storage areas have been maintained for each seller registered at the warehouse.  Under the marketplace model currently in vogue in the online retail space, marketplace players engaged in fulfilment services stock goods belonging to multiple vendors who seek to virtually register themselves in respect of their goods stored at and sold from the warehouse or fulfilment centre. A remarkable innovation implemented by the sector to save storage space and consequently real estate cost (which consequently reduces product cost) is advanced storing solutions such as sector-wise rather than vendor-wise storing of goods; for example, goods requiring refrigeration would be stored in a temperature controlled zone.  In this backdrop, some states have sought to pioneer the concept of “digital demarcation” of warehouses with the e-commerce industry hoping for more states to follow suit, in a clear instance of the tax laws evolving to recognize and accommodate industry trends.

The sector has also witnessed the re-emergence of an age-old debate in India on the characterisation of a sale as being intra-state or inter-state (depending on the characterisation the state eligible to tax the same shall differ).  

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Taxand's Take

To recap, interstate sales are taxable in the state from which goods commence their interstate movement; however, states into which e-commerce consignments are delivered often seek to tax the sale citing conclusion of sale upon delivery in their states.  This issue is particularly pronounced in cases of sale on approval basis including cash on delivery sales (where the customer accepts the consignment upon payment at the stage of delivery of goods).  Current trend has witnessed Indian courts stepping in to resolve this issue of dual tax levy to ensure the same consignment is not taxed in two states.  Industry in the meantime is hopeful of an efficient alternate dispute resolution mechanism to resolve such dual taxation issues.  

Unprecedented movement of goods across State borders to meet customer orders within committed timelines has ushered in a legislative trend of increased compliance and reporting on cross border movement of consignments including a rather unwelcome trend of local taxes being imposed on entry of such consignments.  Hopefully this trend including issues of dual taxation in destination or consumption States shall stand reversed under the imminent Goods and Services Tax (‘GST’) regime India hopes to introduce in the near future.  Under GST, destination States can expect to legitimately derive GST revenues on goods supplied into their States for consumption. 

Another emerging issue that Indian VAT laws need to gear up to address is the manner of taxation of emerging transaction types such as e-wallet, sale by trial, redemption of e-vouchers, drop-shipment, subvention of discount to name a few.  Absence of a specific direction on treatment of the above transactions under Central and State tax legislations including differential taxation of the same across States has led to diverse practice being adopted by the e-commerce sector.   

Industry at large is hopeful of these issues being resolved if not under the current tax laws atleast under GST.  Reports of the Indian Government setting up a specific committee to address tax issues of the e-commerce sector under GST is a welcome move in this backdrop.   In the meantime, it is expected that the laws of the land as well as the business models shall continue to evolve as above.   

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