Taxation of E-Commerce Sector has been a complex issue since the advent of the Industry. The Industry has ushered in the last few years and has taken everyone by surprise through its growth and volume.
The people of India have also shown affinity which is growing day by day towards the E-Commerce sector, which is luring them by way of commitment of quality, discounts and schemes. E-Commerce Industry presents a unique system where each and every system is recorded and chances of evasion of tax are minimal. The sector has been an evolving sector and is on its way of being a major source of tax revenue to the government.
The Taxation regime has tried to evolve itself and bring itself upto the challenge to be able to develop a system for being able to tax the E-Commerce Sector. In this effort, both the State and the Centre has tried to come with their own concept of taxing the sector in the form of Central Sales Tax, Service Tax, VAT, Entry Tax, Equalization Tax(Although in the Nature of Direct Tax).
Issues faced by the E-Commerce Sector in present scenario:
1. Classification issues: Classification issues vis-a-vis goods v/s services have always been a prominent issue for dispute in taxation of e-commerce Industry for e.g. Classification of digital downloads of Music, News Paper, Books etc as goods or services.
The concept of taxation of the Market Place V/s Physical Stock and Sell Model, Cash on Delivery Model V/s E-Wallet Model V/S Advance Payment, Local Delivery of the Goods V/s Inter State Delivery of Goods are only some other issues which makes the sector vulnerable to taxation disputes.
It would be appropriate here to refer the observation in “Working Paper GST Reforms and Intergovernmental Considerations in India” for the Department of Economic Affairs Ministry of Finance, Government of India released in the month of March 2009 wherein it was stated that
“First, the advancements in information technology and digitization have blurred the distinction between goods and services.”
It further went on to provide that
“The so-called ‘value-added services (VAS) provided as part of telecommunication services include supplies (e.g., wallpaper for mobile phones, ring tones, jokes, cricket scores and weather reports), some of which could be considered goods. An on- line subscription to newspapers could be viewed as a service, but online purchase and download of a magazine or a book could constitute a purchase of goods. This blurring also clouds the application of tax to transactions relating to tangible property.”
Further, there is lack of clarity in terms of what would constitute an e-commerce transaction. States have tried to devise their own definition of e-commerce transactions and some states have even not bothered to define what constitute an e-commerce transaction although they are levying entry tax and enforcing compliance requirements on such transactions.
This report “Working Paper GST Reforms and Intergovernmental Considerations in India” for the Department of Economic Affairs Ministry of Finance, Government of India released in the month of March 2009 highlighted the very fact that why India needs to move towards GST and was a path breaking report in terms of the measures suggested for convergence of the taxation structure prevalent in India with the taxation structure required for implementation of GST in India.
2. Issues regarding Multiple Taxation : As if the classification issues were not sufficient for agony faced by the sector in taxation, literal stampede can be observed between the States to tax the e-commerce Industry.
It is an admitted fact that majority of sales of e-commerce dealers is in the course of Inter State Trade or Commerce. The goods which have been otherwise purchased locally is providing revenue in terms of VAT to the State but same goods which have been procured online and in the course of Inter State Trade are not providing any revenue to the destination state. This is sought by the destination state as a loss of revenue for them.
The destination states have now moved towards levy of Entry Tax on the E-Commerce Transactions, although possibly in the garb of protecting the local trade. The Industry by itself is facing the brunt of taxation, because in the course of Inter State Sale, Central Sales Tax is being levied and collected by the origin state and the destination state where goods are being delivered to the customer is levying Entry Tax. This levy of Entry Tax is a recent levy in Rajasthan @ 5.5% and some other states have levied Entry Tax at a rate which has even gone upto 10%. It is no secret that the states which have not levied Entry Tax till date may levy it soon.
This is a perfect scenario which represents a tussle of taxation rights between Origin V/S Destination State where neither of them are ready to leave their right for other. This tussle puts forth another valid reason that why India should move at the earliest towards GST, but without the 1% additional tax proposed for inter-state trade of goods.
This levy of entry tax is in a way creating more of a stranglehold on the E-Commerce Entities to extend their supply chain to respective states and to open their outlet in the destination state. Thus, provide the destination state with revenue under VAT and till date they are not providing any revenue under VAT, they would be paying Entry Tax. However, opening of the outlet is not an easy decision looking to the factors like Market place, Logistic, Storage and Manpower Cost and Taxation issues like use of F Form and its litigations.
3. Compliance Burden increasing day by day: Compliances by the E-Commerce Entities have grown day by day. The way bills for transport, multiple returns in each state, separate compliances in every state are some of the issues faced by the e-commerce entities. Latest in the series of requirements is that some states have asked the e-commerce dealers to file returns containing details of their sales made to the customers in the respective state. In some cases, E-Commerce dealers are filing multiple returns in multiple states, even if they do not have a business place in those States but just because they are selling goods to customers located in those States.
In a nutshell, the way the sector has evolved, the taxation structure has not been able to evolve itself to the concept and there is lack of clarity in terms of taxation of the sector. Each state is trying to bring its own set of guidelines and therefore, implementation of GST would go a long way in streamlining and bringing a common requirement of compliance across the states. The Taxation structure would also be common across the states which will harmonize the tax burden on the consumers.
From the author: In the next update, I would be taking up definition of Electronic Commerce and Electronic Commerce operator as provided under draft GST Law.
CA Dr Arpit Haldia