The Indian ecommerce industry is yet again making news for its ever mangled relationships with the tax authorities across the country. A series of introduction of entry tax on ecommerce transactions by one state after other is the latest addition to this row. Tax authorities in India have always been driven by a blinkered approach for generating tax revenues. However, this approach has time and again created impediments for businesses across sectors. This time it is the ecommerce sector at the receiving end. While so far the states of Uttarakhand and Gujarat have been the pioneers in imposing the levy, the race may be joined soon by other states if there is no timely intervention by the Indian judiciary to examine the constitutional validity of such levies.
Entry tax is levied on the entry of specified goods into a local area at rates identified by the state government. It is noteworthy that the constitutional validity of the entry tax statues across several states has been challenged time and again before the judicial forums. This has been done on several grounds such as the absence of any specific purpose for which entry tax collections would be used, creation of trade barrier and hindrance in free flow of goods. While in some states the levy of entry tax has been held to be unconstitutional, in most of the states, the matter is still pending for judicial consideration.
Amidst the race of taxing entry of goods purchased through an online mode, state governments probably fail to realise the difficulties which the ecommerce players would face. To begin with, such entry tax is likely to be levied on all online purchases while it will continue to be levied only on an identified list of items purchased offline. This would lead to a disparity between goods bought online and the goods bought from brick and mortar shops. Further, this levy could also create a discrepancy between the levies on locally purchased goods through a physical shop versus interstate purchases made through an online portal. This would lead to difference in prices for the same goods from state to state as there is no-uniform practice of levying entry tax on online purchases. As evident, levy of entry tax will pose multiple irregularities on product pricing. Also, the new levy is likely to create market divisions making the tax regime more abstruse. The ecommerce companies shall also have to make significant modifications in their IT systems to track entry tax payments. We are aware that such tax is going to be subsumed in GST and therefore investments on such modifications will become redundant. On the whole, this new levy would discourage sellers to sell their goods to the customers in states with entry tax on ecommerce transactions in view of increased cost and compliance involved in such sales.
The aforesaid concerns indicate that the levy of entry tax on ecommerce transactions could well be against the spirit of the Constitution of India. Article 301 and 304 (b) of the Constitution ensure free flow of trade and commerce by restricting the states from imposing a tax which discriminates between goods manufactured within the state versus the ones procured from outside the state. Considering the possible disparities between product procurements from two different states on account of the levy of entry tax on ecommerce transactions, it would be interesting to analyse the vires of such levies on this ground alone.
In the age of technology, when the government is focusing on concepts like ‘Digital India’ and ‘Ease of doing business in India’, it is rather a regressive action to create impediments for online businesses. In order to standout in the market and increase the customer base, ecommerce companies sell the products at competitive prices by giving discounts out of their pockets. With the introduction of entry tax on the online purchases, loss balances of the ecommerce business houses are expected to soar up. The practice of levying newer taxes focusing on the online business models would ultimately render the ecommerce sector uncompetitive in long run. In fact, opening up of 100 percent FDI in the ecommerce sector for higher foreign funding will not be successful in the midst of the increasing tax tangles and disparities.
The deleterious effects of the new levy on sustainability of the online market participants and country’s economic viability are likely to cost more than the benefits that could be reaped from its introduction. Representations and writ petitions are being filed by various online market players across states, seeking corrective measures against the levy which is likely to cause multiple tax glitches. Absence of a uniform mechanism would just add to trade barriers which go against the spirit of free trade and commerce. The state governments should now focus on streamlining the existing tax regime so that the transition to the proposed GST regime doesn’t complicate any further. This would help in the creation of a tax-conducive environment encouraging businesses to increase their footprint resulting in higher revenues for the governments.
– By Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP with inputs from Poonam Harjani and Siddharth Tandon