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How can e-commerce sites be retailers for tax purposes and not for FDI asks Delhi HC

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Amid lack of clarity on foreign direct investment (FDI) policy for ecommerce websites and marketplaces, the Delhi High Court pulled up state and central government agencies and asked them how sites such as Flipkart, Amazon and Snapdeal can be treated as retailers for taxation purposes and not the same when it came to FDI, as indicated by Press Trust of India.

“Prima facie, the Union of India/State Governments cannot, on the one hand, for the purpose of tax, treat such sales as retail and on the other hand, for the purposes of investment, not treat the same as retail sale,” said Justice Rajiv Sahai Endlaw while listening to a petition alleging that e-commerce sites are violating FDI policy by retailing goods through Internet.

The case was registered by an association of footwear makers and retailers which contended that though FDI is prohibited in retail that there are entities retailing goods through the Internet are not being restrained from accepting foreign investment. It added that Internet-based entities are in this way violating the FDI policy and thus, prejudice was being caused to them.

Accordingly, the court sought replies from the Centre, Delhi Government, Reserve Bank of India and the Enforcement Directorate. The next date of the hearing is on October 14.

Taxation and FDI situation currently

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In India, 100% FDI is allowed in business-to-business (B2B) ecommerce, while it is banned in the business-to-consumer (B2C) segment. Besides, there is a 30% local sourcing rule for foreign players.

It’s worth noting that there are currently three states in India – Delhi, Kerala and Rajasthan – which have a legislation which says that ecommerce companies are not merchants, but aggregators who bring sellers on a platform. Earlier in September, the Delhi government made it mandatory for all ecommerce companies and platforms to file transaction information by their sellers and traders via their platforms or website. This is a move that will help the Delhi Government’s Department of Trade and Taxes to identify sellers of goods and services, and ensure that adequate taxes are being paid by the sellers.

As of now retailers need to pay Central Service Tax (CST), Value added tax and also separate tax in the state the item is sold in, for each product. Each of these taxes need to be paid at different centres and though it can be done online, it is not always a convenient process, or one that can be automated according to retailers. This is a big problem for ecommerce companies that operate at a bigger scale and need to sell products across states in India on a daily basis.

Other taxation problems

– In January, The Kerala commercial taxes department put a fine of up to Rs 54 crore on e-commerce players for evasion of sales tax in 2012-13 and 2013-14. The companies which have been fined include Flipkart, Jabong, Vector e-commerce which has a stake in Myntra.com and Robemall apparels which operates Zovi.com.

– Ecommerce players also ran into trouble with the Karnataka government last year, most notably Amazon. The Karnataka government is now planning to amend the Value Added Tax Act to bring transactions on e-commerce sites under its ambit.

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– The Punjab government too is taking stock of the loss of revenue to the state from online shopping. The Punjab government has asked the websites to furnish details of items they have sold to people living in Punjab. They also plan to ask these companies to set up warehouses in the state so that it can ensure payment of local taxes.

Image source: Flickr user Brian Turner

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