VAT Implication on E‑Commerce Firms

E‑commerce firms are com­ing in for a clos­er look by sales tax author­i­ties. The ‘mar­ket­place’ argu­ment used by these enti­ties to side­step for­eign direct invest­ment norms may not pass muster with tax author­i­ties keen to pro­tect their val­ue-added tax (VAT) revenue.

As a provider of a mar­ket­place, e‑commerce firms say that they do not hold own­er­ship titles to prod­ucts, but only pro­vide a “ful­fil­ment ser­vice” by get­ting a buy­er and sell­er to trans­act on their platform.

Some e‑commerce com­pa­nies such as Flip­kart have moved away from the inven­to­ry-based busi­ness mod­el to this mar­ket­place mod­el. Flip­kart, which owned WS Retail until Jan­u­ary 2013, sold it to a group of high net-worth indi­vid­u­als to avoid inves­ti­ga­tions under the For­eign Exchange Man­age­ment Act.

Ama­zon in India is already fac­ing tax chal­lenges and has even tak­en up this issue at the lev­el of the Prime Min­is­ter. State-lev­el tax author­i­ties, espe­cial­ly in Kar­nata­ka, con­tend that these mar­ket­places should be viewed as trad­ing out­lets of e‑commerce firms.

They have asked sell­ers (third-par­ty ven­dors) not to store their prod­ucts at the ware­hous­es owned by e‑commerce firms. This is because e‑commerce com­pa­nies are not pay­ing VAT on the prod­ucts sold from such warehouses.

The e‑commerce com­pa­nies con­tend that they do not have to pay VAT on prod­ucts sold from their ware­hous­es through their elec­tron­ic plat­forms as they fol­low the ‘mar­ket­place’ mod­el. Own­er­ship of the prod­ucts, they con­tend, lies with the third-par­ty ven­dors, who store their prod­ucts after approval by state tax authorities.

But the Cen­tre wants the e‑commerce firms to pay ser­vice tax on the fees (ser­vice fee) they earn from the marketplace.

“Tax­a­tion issues around e‑commerce firms are still unre­solved. The indi­rect tax (VAT, ser­vice tax) out­comes will have far-reach­ing ram­i­fi­ca­tions on their being com­pli­ant with FDI norms and could even lead to the death of e‑commerce,” said Sujit Ghosh, Part­ner at law firm Advai­ta Legal, speak­ing toBusi­nessLine .

So, what would be the fall­out on com­pli­ance with FDI norms if the tax­man were to extract val­ue added tax from them?

An impor­tant out­come, say tax experts, would be that e‑commerce firms would then be con­sid­ered to be the own­ers of the goods and there­fore treat­ed as traders, lead­ing to vio­la­tion of FDI norms on mul­ti-brand retail, if they had any for­eign equi­ty holding.

This is because VAT is usu­al­ly paid by sell­ers of goods hold­ing own­er­ship rights/title to them. Cur­rent­ly, for­eign invest­ment is not allowed in mul­ti-brand retail.

Many e‑commerce firms with for­eign own­ers are get­ting around this norm by con­tend­ing that they are nor retailing/selling goods, but only pro­vid­ing a marketplace.