The industry, trade and commerce has for generations got used to a habit of minimizing its tax liability (a jargon used in common parlance is ‘tax planning’) or pay no taxes at all. To pursue this goal, they can go to any extent exploiting loopholes in tax laws thereby denying state its legitimate dues.
And if you have on plate a new form of economic activity or business transactions for which the extant tax rules and regulations are out of sync or inadequate, that may turn out to be a gold mine for the industry and trade. For sure, that gives an easy opportunity to them to escape the tax net completely. The e-commerce transactions provide one such avenue.
From a few hundred million dollars a couple of years ago, currently e-commerce is about US$ 20 billion and projected to increase 15 times to US$ 300 billion by 2030 ( as per a study by Goldman Sachs). Considering huge value of business in this segment, it is fair to expect that all legitimate taxes are paid to the state.
Yet, companies such as Snapdeal, Flipkart, Amazon etc have not paid VAT [Value Added Tax] on their e-commerce transactions. In Karnataka for instance, the state has lost about Rs 2000 crores. In Delhi, according to sales tax department, tax dues from online trading could cross Rs 500 crore. In several cases, VAT was collected from consumers but not deposited with the authorities.
A close look at their architecture of doing business and a variety of models employed by e-commerce companies would clearly bring out their ‘intent’ to escape the tax liability.
Under the Sales Tax/VAT legislation, a liability for tax arises when a person/company/business entity sells good and services and receives consideration from the customer in exchange for the same. The tax is levied on the amount received at the applicable rate and deposited with the state where the transaction happens.
In customary cases, where the entity has a physical outlet say, a mom-and-pop store or a corporate outlet (e.g. Reliance Fresh/Big Bazar/Home Town etc) and related infrastructure such as a warehouse/storage space etc, ownership of goods and services is clearly established and these are exchanging hands at the outlet, the case for levy of VAT is absolutely clear.
The entity must be registered with the sales tax authorities in the state and have a Taxpayer Identification Number (TIN). As per the requirements of the Act, for every sales transaction it must raise an invoice which should include all relevant details as also the applicable VAT and the amount of tax.
In e – commerce, the customer registers his/her request for an article on the web portal of company which raises the invoice and arranges for its delivery at customer’s address. The company also receives consideration either through net-payment or cash paid by customer to its delivery person. In short, sans ‘physical’ interface, all of its functions are fundamentally the same as that of a mom-and-pop store/retail outlet.
Then, why should e-commerce companies not pay tax? They argue that they are only service providers while business is done by companies that manufacture the good; hence tax liability lies with latter. The argument is fallacious as it is e-commerce company which performs all sales related functions viz., booking order, raising invoice, making delivery and receiving payment.
In a bid to escape the tax net, they have employed all sorts of documentation techniques to ‘camouflage’ their role as seller of goods. Thus, under one model, the e-company goads manufacturer/supplier to raise invoice even as it continues to handle the entire sale transaction. This way, it tries to give an impression that it does not own the goods and therefore, it is not liable to pay tax.
Alternatively, even as e-company raises invoice on customer, simultaneously, manufacturer/supplier of good raises an invoice on the e-company. The two operations are ‘synchronized’ to ensure that e-commerce company does not own stock even for a moment. Even as all this documentation engineering happens, it merrily collects the money, keeps its profits and passes on purchase price to the manufacturer/supplier.
For an e-commerce company to be a successful venture, it is imperative that it has all the ‘logistics’ wherewithal to ensure timely delivery of goods to customer. Indeed, all big companies not only keep an eye on availability of all sought after goods, their sources/points of supply, contractual agreements but also keep sufficient stocks in their own store houses.
In essence, e-commerce companies are very well positioned and adequately equipped to initiate and successfully consummate a sales transaction. In this backdrop, much touted argument that they are merely facilitators; that they just provide a platform where buyers and sellers meet is untenable. The stark reality is that they own goods, handle the logistics, make supplies and collect payments. Without any doubt, they have a liability to pay VAT.
Since, e-companies do not have to maintain physical shops and enjoy benefit of scale economy, their establishment and labor costs are substantially lower than mom-and-pop stores. This in turn, enables them to offer lower prices to buyers. The advantage of hassle free on-line shopping and phenomenal growth of internet has given them a further boost.
At present, there are more than 94 million broadband users in India, while the total internet connect population is close to 300 million. Of this, about 39 million Indians shop on-line (according to research report by consulting firm, AT Kearney done in April, 2015). This number will only increase leaps and bounds.
Opportunities galore are waiting to unfold for e-commerce companies. These companies will not only garner a good slice of future growth in retail business but also gain at the expense of brick and mortar outlets and shopping malls etc. A fair question then to ask is how could they remain out of the tax ambit?
These companies will necessarily have to come to terms with ground realities, remove the smokescreen that they have thus far erected around their operations and proactively engage with the state authorities to work out arrangements for payment of tax on all their sales transactions as per relevant state laws.
On its part, Modi – government should set up a committee of tax experts including representatives from center, states and industry & trade associations to get the entire issue examined comprehensively and suggest necessary amendments to VAT rules and regulations for adoption by all states preferably on a standardized template for ensuring full compliance.