Decoding the online retailer's tax conundrum

As e-commerce gains momentum, online retail sales is bound to be a war field between the e-commerce portals and the tax authorities  like VAT.

In actual practice and in simple terms there is no difference between online retail sales and conventional sales. In both cases the buyer places an order for products and the sale is complete generally when the product is delivered to the buyer.

The situs (place) of the sale in case of conventional sales can be outside or inside a state depending on the place of despatch of the goods. If a product is despatched outside a state, generally it is a regarded as inter-state sale and CST is charged by the buyer.

Likewise, if despatch or delivery of the product is within a state it is subject to state VAT.
In fact, the argument by some to enact separate laws for e-commerce, citing examples of  foreign countries, reflects our habit of always looking to west when the sun rises in the East.

This is a practice observed in conventional sales as well, where products are marketed by marketing agents or indenting agents. In such cases , the buyer places an indent on the marketing agent.

The agent in turn, places an order to the seller for direct despatch of goods  to the buyer from whom the seller generally collects the sale proceeds and pays the agent his commission.

Alternatively, it is possible the agent can collect the full payment from the buyer in advance and he in turn pays the seller after deducting his commission. In these cases the VAT is chargeable and payable by the seller and not the agent.

Agents are covered under the definition of dealer under the Karnataka VAT Law, only when they sell the goods  on behalf of the principal.

Amazon not liable for tax
E-commerce portals can be of two types. The first being any trader or manufacturer  can have his own portal where he receives orders for goods, processes them, delivers goods on his own account and pays VAT on such sales if the sales are within the state or pays CST in case of interstate sales.

The other, typically employed by Amazon and Flipkart, is to play around restrictions on e-commerce through foreign direct investment.

In these cases, the portals facilitate sales by  business entities by  offering them space on their web portals to show case their products and price.

Karnataka commercial tax authorities argue that the portals are dealers under the law by virtue of the fact that they distribute or supply goods for commission and are therefore liable for registration. This is a misinterpretation of the law, as liability for registration arises only when a dealer sells goods exceeding the prescribed limit in a year. E-commerce transactions, however, do not fall into this category,  making it unnecessary for such portals to get registered under the VAT Law.

The grouse of Karnataka’s commercial tax authorities that sellers store goods in Amazon warehouses and declare it as a place of business is not permissible and against the law. Nowhere in the K-VAT Law does it say that sellers cannot store goods on third party premises.

In fact, as far as Amazon is concerned the goods belong to a third party as Amazon has no ownership to such goods. Storing of third party goods is a common commercial practice. For instance, sub-contractors store goods of others for processing and return.
The location of the seller is another important factor. If the sellers using the e- portal services of  companies like Amazon are located outside Karnataka and on receiving orders through Portal, such sellers despatch goods from outside the State directly to the buyer in it, the state would not get any revenue as the CST collected by the  seller goes to the State the seller is located.

This is not always the case as sellers outside the state may store their goods for common sales in Amazon warehouse located in the State of Karnataka and the despatch may be to buyers in the State from the warehouses located in Karnataka.

In such cases it is possible that sellers located outside the state may be raising bills and charging CST as if such sales are inter state sales whereas legally  such sales within the state as goods are despatched from the warehouses located in Karnataka which are ostensibly declared as place of business of sellers.

It is this aspect of  VAT law that the Karnataka tax authorities have to look into to plug possible revenue losses.

It is known even to a child that when  one asks  for a bill from a retailer, he will immediately retort: “It will cost you extra towards VAT”. This dissuades the buyer from receiving the bill and no tax is paid on such sales. Are the commercial tax authorities not aware of this and what they have done to check this trend?