Entry taxes on etailers fragment the all-India market
Given how India is gearing up for the introduction of the Goods and Service Tax (GST) where all entry taxes—the few that still remain—are to be subsumed in the overall GST rate, it is unfortunate that various states should be imposing an entry tax on goods sold by e-commerce players. If the taxes were minor, there wouldn’t be too much of a problem—though collecting these is a logistical nightmare, and right now courier companies are expected to collect—but the levels being imposed are quite large and are meant to compensate for the loss in revenue. If a customer buys a phone in a brick-and-mortar store in Patna, for instance, she will pay VAT which will be passed on to the Bihar government. In case the phone is purchased online and the delivery is made from a warehouse based in Chennai—it doesn’t matter if the warehouse is that of the eventual supplier or of the e-commerce firm—the VAT will be deposited with the Tamil Nadu government. A state wanting to protect its tax base is one thing, but it cannot be at the cost of the customer who, once entry taxes are imposed, ends up paying—in our hypothetical example—both the Tamil Nadu VAT as well as the Bihar entry tax.
Apart from the fact that GST may be delayed, it is not wise to assume that this is a temporary problem and will be resolved once GST is introduced since all entry taxes will be subsumed—there are over 1,000 cases on entry tax pending in the Supreme Court after a 5-judge bench ruled, in 2010, that a larger bench had to reconcile the conflicting judgments given by various high courts. Such entry taxes, in effect, end up distorting the all-India market and create smaller sub-markets—in order to avoid a Bihar entry tax, for instance, this means the distributor will have to set up a warehouse in Bihar. Given that states like Gujarat, Madhya Pradesh and Rajasthan, among others, are considering a similar levy according to The Economic Times, this means suppliers will now have to set up warehouses in many states, not necessarily in the one where it is most efficient from the point of view of logistics. If the central government is keen on promoting etail, it needs to sit down with the state governments to find a solution. Meanwhile, given how the online retail market is projected to expand to $69 billion in 2020, the GST Council also needs to ensure that such taxation does not carry on in the post-GST era.