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Telangana may levy VAT on e-commerce deliveries
Highlights
Telangana, India’s youngest state is slowly becoming the go-to state in the south for big businesses. In attracting investments from industry majors, the state is giving tough competition to its neighbours, Andhra Pradesh and Karnataka.
Telangana, India’s youngest state is slowly becoming the go-to state in the south for big businesses. In attracting investments from industry majors, the state is giving tough competition to its neighbours, Andhra Pradesh and Karnataka.
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In the past year, Telangana has become the favourite of major e-commerce, retail and aviation companies. While Amazon has one of its largest fulfilment centres in the state and is planning to open another, Flipkart has decided to set up its largest warehouse in Hyderabad. In its first major investment in India, Swedish furniture major IKEA has bought 13 acres near Hyderabad.
US aviation giant Boeing will set up a defence plant in the state, in association with the Tata group. This will be the biggest investment in defence sector in the country so far.
Of late, the State is noticed a sizeable drop in VAT collections over the last few months, probably because of a surge in e-commerce transactions that were evading VAT payments and a fall in brick-and-mortar format store sales. Due to this, the State is looking at ways to tax e-commerce transactions to get a piece of growing e-commerce revenue, as of now the State is losing the tax revenue from the growing e-commerce transactions. State has been deliberating how to plug revenue losses arising from e-commerce transactions, for a few months.
With online sales growing rapidly on the eve of festival seasons, e-commerce firms are offering the high discounts to the customers; sales tax department in the state is grappling to plug what they see as revenue leakages.
Through the State contributes significantly to the booming e-commerce business, the sunrise sector hardly brings in any additional tax revenue under the existing tax laws.
Most of the leading e-commerce companies were set-up in Hyderbad like Amazon and Flipkart among other leading firms, whose turnover is estimated at over Rs.2500 crores, which were encouraged to set-up their fulfilment centres, do not charge VAT on the goods supplied to the consumer states, as facilitators of these transactions they are liable to pay only service tax under Central Sales Taxes.
As per the tax laws in vogue, when goods are move from one State to other, taxes accrue to the State from which goods originate. But under model of business to customer (b2c), manufacturing states are walking with all the tax revenue, where as the consumer States are left out of Value Added Tax (VAT) through the sales actually takes place in their territory, where the goods are delivered. Though the State has leading e-commerce business warehouses, but it is losing revenues heavily.
Not only Telangana have this problem, even Kerala and Karnataka have flagged this issue and they brought into place certain checks, which however have been contested by e-commerce firms. The consumer States argues that indirect tax is consumption based tax anywhere in the world.
To tap the revenue, the Karnataka commercial tax department had stoppedAmazon India from selling electronics and several other products from its warehouse in the state by cancelling the licences of merchants that work with the local unit of the world’s largest online retailer.
The Karnataka tax department proposed a 1 per cent levy on payments by buyers to sellers on ecommerce sites, a move that could encourage other states to follow suit. They levy, in the form of value-added tax deducted at source. If put in place, ecommerce companies will have to deduct 1 per cent of payments made to vendors before passing the money on, making goods costlier for consumers.
Placing the onus on the e-commerce marketplace to deduct TDS (tax deducted at source) on the goods sold through it is against the very principle of VAT on goods and detrimental to the e-commerce environment in the country, is opposed by the Amazon India and other firms.
Taxation of e-commerce companies has been in focus for some time, particularly after Karnataka questioned Amazon's fulfillment center model and sought to impose value-added tax on goods sold through the site, treating it as a commercial agents.
Another point of concern for Telangana State is that it accounts for large chunk of consumers patronizing online sales of a variety products promoted by e-commerce portals that are offering competitive prices to the consumers sans VAT, the trade volumes of conventional retailers in the State have apparently been taking a hit.
This is hurting the Consumer State on two counts, as the revenue from conventional retailers is falling because of decline in turnover and secondly, the consumer state gets no share in tax revenue from online sale and delivery of goods. Ultimately, it impacts economy and GSDP growth. Exports pointed out that if it goes unchecked, this will not provide a level- playing field to the brick and mortar traders, who set up shops and carry on transactions in physical form from their premises and pay VAT.
Experts also advised that the state will have to look at issues like how transactions will be taxed in cases where there is cash on delivery and the transaction is completed only when the goods are delivered and payment made, and also if such firms are marketplaces or vendors.
This is because if the good had been sold from the warehouse to a retail vendor who then sells it to the final customer, then a 2% CST would have been levied in the state where the warehouse is located and the applicable VAT would have been levied by the consuming state when the retailer sells the good to the final consumer.
This problem will, however, be solved once the goods and services tax (GST) is implemented. Under GST, the centre will levy and collect an integrated GST rate on inter-state sale of goods and then transfer the money to the consuming state.
Thus the government is exploring possibilities including amending provisions of its VAT Act, suitably to bring e-commerce transactions under tax model on online sales, while devising specific laws is the need of the hour clearly defining the taxable event, the person liable to pay tax, liability of the person acting as pas through etc, while taking into confidence of e-commerce firms.
By G Rajendera Kumar
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