E-Commerce - GST and Indirect Tax Issues

[pranav deshpande]

E-Commerce, in itself, is a taxation quagmire. The roots lie in the classic sale vs service controversy, in which the respective e-tailers could treat the transaction as a service, whereas States want to treat it as a transaction subject to State VAT. Amazon is a classic example, in which Karnataka took the lead.

Even within the sales tax controversy, the next question is that of a level playing field. If the State, in which these e-tailers have set up shop, should get the State VAT, should the States, where the end subscribers are actually based, be deprived? If an e-tailer adopts the VAT model, he can always open a warehouse in the respective State and levy VAT on local sale, but that’s because he has selected a sale model and he will enjoy VAT credits. It does not work in a service model scenario. In this scenario, even if the transactions are cross border, across States, the respective litigating authority will demand full VAT, in absence of a C Form. Therein lies the additional difficulty. And let us not forget the interest and penalty part.

The situation can get further complicated if States amend their respective VAT laws, to provide for taxing such transactions. Even if the taxing entry gets challenged in Courts, another front that will be opened with this, is that of jurisdiction. States, in which offices are not located or from which billing is not happening, are not going to simply allow stock transfers, without something going in their kitty.

From a social perspective, Governments, doubtless have to lend voice to pleas of local retailers and traditional selling outlets, whose business faces stiff competition from such e-tailers. It is likely that lobbying by a plethora of such traders will move the State Governments to enact strict laws on e-commerce.

Will GST address this? To an extent, Yes. If the State of consumption gets the tax, all issues being raised by such States, will go away. Of course, the State which was demanding or getting full tax, will lose its revenue, under GST, as other States will share it. Well, as they say, ‘you win some, you lose some’

CA. Pranav Deshpande

E-Commerce, in itself, is a taxation quagmire. The roots lie in the classic sale vs service controversy, in which the respective e-tailers could treat the transaction as a service, whereas States want to treat it as a transaction subject to State VAT. Amazon is a classic example, in which Karnataka took the lead.

Even within the sales tax controversy, the next question is that of a level playing field. If the State, in which these e-tailers have set up shop, should get the State VAT, should the States, where the end subscribers are actually based, be deprived? If an e-tailer adopts the VAT model, he can always open a warehouse in the respective State and levy VAT on local sale, but that’s because he has selected a sale model and he will enjoy VAT credits. It does not work in a service model scenario. In this scenario, even if the transactions are cross border, across States, the respective litigating authority will demand full VAT, in absence of a C Form. Therein lies the additional difficulty. And let us not forget the interest and penalty part.

The situation can get further complicated if States amend their respective VAT laws, to provide for taxing such transactions. Even if the taxing entry gets challenged in Courts, another front that will be opened with this, is that of jurisdiction. States, in which offices are not located or from which billing is not happening, are not going to simply allow stock transfers, without something going in their kitty.

From a social perspective, Governments, doubtless have to lend voice to pleas of local retailers and traditional selling outlets, whose business faces stiff competition from such e-tailers. It is likely that lobbying by a plethora of such traders will move the State Governments to enact strict laws on e-commerce.

Will GST address this? To an extent, Yes. If the State of consumption gets the tax, all issues being raised by such States, will go away. Of course, the State which was demanding or getting full tax, will lose its revenue, under GST, as other States will share it. Well, as they say, ‘you win some, you lose some’