E-commerce has been budding as a new endeavor in the past few decades. It has brought about a breakthrough in all possible fields and interests including consumer behavior, supply and demand of products, handling of orders, etc.
Generally, “e-commerce” is used to denote a method of conducting business through electronic means rather than through conventional physical means. Such electronic means include ‘click & buy’ methods using computers as well as ‘m-commerce’ which make use of various mobile devices or smart phones. This term takes into account not just the act of purchasing goods and / or availing services through an online platform but also all other activities, which are associated with any transaction such as:
i. Delivery,
ii. Payment facilitation,
iii. Supply chain and service management.
Being such a significant venture, it has managed to create an obscurity in the revenue department regarding tax liability.
This ambiguity has further grown indistinct due to the case of Amazon India, where the Karnataka VAT Authorities demanded VAT from Amazon, contending Amazon India as commission Agent.
Amazon India Case:
Under the Karnataka VAT Act, 2003 every registered dealer is supposed to get his business premises registered with the authorities along with any other additional places of doing business popularly known as branch. The dealer has to pay VAT on transactions carried out at not only the head office but also at the additional place of business. In the instant case, the dealers were stocking their products at Amazon’s warehouse but had not registered this as an additional place of business in their registration certificate. Hence, the department proceeded to cancel the registration of such dealers.
Further, the Commercial Taxes Department asked Amazon to pay VAT on behalf of sellers as it was acting as a commission agent. The Department was of the view that that Amazon is liable to pay the tax as the ownership of the good is transferred to the ecommerce company till they sell it. It is something similar to a shopkeeper stocking goods with a buyback clause with the manufacturer that they will give the product back if it remains unsold.
Logic behind the tax authorities demanding tax could be that since Amazon India stores products of more than one kind and that too not in a random fashion but there is some science behind the stockings, there is an element of value addition.
Amazon contented that it is only a service provider providing services of storage, delivery and collection of money for the seller and at no point does it own or sell the product. Subsequently, Amazon collects the money from the sale and passes on the amount to the merchant after deducting its commission. The dealer remits VAT to the government. Amazon further contended that the stand of the department would lead to Amazon violating FDI rules in the country, which prohibits FDI in retail.
Further, as per a news report by The Economic Times, the department laid down two conditions to Amazon India, as an alternative to being registered as a dealer. Firstly, Amazon India must disclose details of transactions carried out on its website and secondly, it must take primary liability if a merchant defaults paying VAT on transactions executed on Amazon.
While Amazon has no problem with the first demand, it has declined the second. Perusal of the two conditions implied that Karnataka VAT authorities would want to treat Amazon India as a "commission agent" status, which the online marketplace is not willing to accept in view of federal regulations that will ultimately bar foreign direct investment in online retail.
The tax department also required Amazon to prove, whether VAT for a certain transaction has been discharged, if the department raised a claim. Amazon India executives also argued that their core activity in India is providing modern warehousing facilities for merchants to store products, display and provide a technology enabled online marketplace for those products, and facilitate online sale and receipt payment on the merchant's behalf, among other things. The Amazon executives also argued that each partner merchant of Amazon is a VAT assesse, and is required to remit VAT collected every month. Also, when a merchant on Amazon's digital marketplace pays VAT, he pays only on the value added part of his transaction as he can claim input tax credits on purchases already made. But in the event of a default, Amazon India will not be able to claim input tax credit as it will not have access to a merchant's transaction history, and will have to pay VAT on the full sale price of a product.
The Karnataka Government is now in the process of amending the State VAT law to bring it in line with modern times and include a reference to Ecommerce transactions. The government says the amendment will deal in the marketplace model, which most players have in different measure.
In this model, e-commerce players offer an online platform that retailers and buyers can use to make transactions; the ecommerce players may also offer logistics and warehousing facilities to the sellers. Amazon in India has only a marketplace model, but the same in Flipkart's case is a small part of its overall operations, because most of the sales are done by the company, though through a different entity.
Since the e-commerce players in the marketplace model do not directly sell goods, VAT should not be applicable to them. But a state finance department official said since companies like Amazon offer their platform and services for a commission, "even commission agents have to pay tax''. Under the existing VAT Act, both dealers and commission agents have to pay tax. The state government's amendment is expected to clarify that whether the ecommerce players will fall under that category.
Models in e-commerce selling:
Here it is pertinent to note that the above is just one model of e-commerce. Whether VAT shall be applicable on seller or e-tailer depends upon the model and nature of sale.
The typical e-commerce model of online selling relates to a situation where an e-commerce company provides an online portal wherein the sellers including manufacturers, retailers etc. advertise their products along with product specifications and pricing. A buyer visits this portal and places orders directly with sellers. The e-commerce company thereafter picks the product from the seller’s warehouse and delivers the same to the buyer at his doorstep. The e-commerce company collects consideration from the buyer and remits the same to the seller after deducting a pre-decided amount, from the said consideration towards its service charges.
The common models of e-commerce are listed below-
Model 1: The e-commerce company buys the products in bulk in discount and then sell the same at cheaper price by the help of its online e-commerce platforms. However, this is not a general model as high cost and working capital pressure is involved.
Model 2: The e-commerce company, already owns certain products and sells the same in the name of its own, invoice is also raised in the name of the e- commerce company. In this case, the VAT liability of the e-tailer is same as that of any other offline dealer. Example of such e-tailers are: Yepme.com
Model 3: After getting the order from the customer, the e-commerce company purchases the same from the seller and then further makes a sale to the customer. In this case, the invoice is raised in the name of the ecommerce company, which after deducting the commission deposits the balance amount in the account of the seller. Thus there is a two-phase sale, one from the seller to the e–tailer and other from the e-commerce company to the customer.
Model 4: This is known as market place model where the e-commerce company asks the third party sellers to sell the goods and services by using its platform to the customers who log on the e-commerce company’s platform. The e-commerce company charges commission / delivery charges. Thus, once the order is placed by the customer to the e-tailer, the seller dispatches the goods to the consumer’s address, from its own warehouse. The invoice is also issued in the name of the seller. In this case, the VAT liability is of the seller, where the e-tailer only gets his commission, and pays service tax on the same.
Model 5: This is commonly known as Facilitator Model which is frequently adopted to act as a platform facilitator between the sellers and the buyers. Under this model the e-tailer undertakes to perform packing and marketing / delivery of the goods to the customer. However, the invoices are made at the end of independent sellers directly to the customers. In such a transaction the website acts only as a facilitator and gets a commission for providing the service. The e-commerce company has to pay a service tax on the commission it has collected. There is no question of sales tax or value added tax in such a transaction. Sales Tax/VAT is collected by the seller directly from the customers itself. Similar to the model discussed above, the Invoice too is raised in the name of the seller and not e-tailer. These e-commerce companies merely acts as a mediator.
However, in order to ensure quick availability of products with e-commerce company these sellers are required to amend their registration to include the space/premise with e-commerce Company as “Additional place of business (if already registered with main office”) based on rent / lease/ Service agreement entered into between the sellers and e-commerce Company. From this premises of e-commerce company, all the goods are then gathered, processed / packed and sent for delivery to the customers either independently or vide dedicated courier agencies.
Certainly, the e-commerce companies have developed various ways to predict customer preferences and interpret which products will be in demand and thus, to save time and logistics cost and to earn a little extra money, e-commerce companies store goods which they feel will be in demand in the market. These goods are stored at a warehouse which is called a ‘Fulfilment center’. This arrangement serves to ‘fulfill’ the demand of the customers at the fastest possible time. The bone of contention between Karnataka Tax Authority and Amazon India {as discussed above} is bringing under VAT purview these types of transactions only.
E-commerce taxability vis a vis Delhi-VAT:
On 26 June 2015, the DVAT Authorities vide Notification No. F.3(515)/Policy/VAT/2015/330-41, in order to cross check the volume of sales reported by these suppliers and payment of VAT, has sought direct information of sales by these suppliers from e-commerce Companies and thereby has prescribed a return, to provide details of dealers located in Delhi, supplying goods either to customers of Delhi or outside Delhi and details of dealers located outside Delhi, supplying goods to customers of Delhi, for the persons engaged in providing facility of electronic shopping (commonly known as e-commerce) through their web-portals, i.e. companies/firms/LLPs/ proprietorship concerns etc. which may be acting as facilitators, directing the transaction to the dealer concerned for supplying the goods to the customer who has ordered for such supply or supplying the goods directly to the customers from the godown maintained, managed and owned by such facilitating entities, where the goods of concerned dealer have already been stored.
Conditions:
1. All such persons engaged in the business of e-commerce like Amazon, flipkart, snapdeal shall have to enrol themselves by logging on to the web-site of the department (www.dvat.gov.in) at first by clicking on the relevant link in the Menu. Basic information has to be filed online in Form EC-I. A unique ID would be generated after successful submission. This ID should be used for filing the said return. Password for logging on to the site would be communicated on email provided by the person.
2. Return should be filed on quarterly basis in Form EC-II & EC-III by 10th day of the month following the quarter to which the return pertains. The first quarter return needs to be filed by 30-09-2015, as extended vide circular dated 21-7-2015.
3. Net sale turnover of a dealer, reducing there from the turnover of the sold goods returned which have been sold during the same quarter shall be reported in the return. The return of a quarter can be revised by the end of next quarter for making corrections for the goods sold in that quarter but returned in subsequent quarter.
Interpretation of Statutory Provisions of DVAT:
A strict interpretation to the definition of Dealer, provides that e-commerce companies are Dealers under Section 2(j) (i) of the DVAT Act, 2004 ignoring the facts that VAT is already been paid by the original sellers on full value of consideration.
It can be said that, as of now DVAT department is not treating the e-commerce companies as dealers under existing law instead it has just prescribed form EC-I, EC-II and EC-III to unearth under reporting of sales by the suppliers who fulfill the online orders. The department aims to achieve the collection of VAT without hampering the atmosphere of trade in the city.
Conclusion:
It is worth noting that the ambiguity regarding VAT liability persists because till date there are no specific laws or provisions governing e-commerce sales in India.
To wrap up the discussion, one can say that if the seller is the owner of the goods, wherein the seller is responsible for issue of invoice and has the warehouse registered in its name, the prime responsibility is of the retailer and not the e-tailer to pay VAT. However, if the e-tailer owns the warehouse, from where the products are dispatched and also issues the invoice in his own name, the liability to pay VAT will emerge on the e-tailer similar to the one who is selling offline.
CS Priyanka Gupta
APRA Associates (VAT Team)
E-commerce has been budding as a new endeavor in the past few decades. It has brought about a breakthrough in all possible fields and interests including consumer behavior, supply and demand of products, handling of orders, etc.
Generally, “e-commerce” is used to denote a method of conducting business through electronic means rather than through conventional physical means. Such electronic means include ‘click & buy’ methods using computers as well as ‘m-commerce’ which make use of various mobile devices or smart phones. This term takes into account not just the act of purchasing goods and / or availing services through an online platform but also all other activities which are associated with any transaction such as:
i. Delivery,
ii. Payment facilitation,
iii. Supply chain and service management.
Being such a significant venture, it has managed to create an obscurity in the revenue department regarding tax liability.
This ambiguity has further grown indistinct due to the case of Amazon India, where the Karnataka VAT Authorities demanded VAT from Amazon, contending Amazon India as commission Agent.
Amazon India Case:
Under the Karnataka VAT Act, 2003 every registered dealer is supposed to get his business premises registered with the authorities along with any other additional places of doing business popularly known as branch. The dealer has to pay VAT on transactions carried out at not only the head office but also at the additional place of business. In the instant case, the dealers were stocking their products at Amazon’s warehouse but had not registered this as an additional place of business in their registration certificate. Hence, the department proceeded to cancel the registration of such dealers.
Further, the Commercial Taxes Department asked Amazon to pay VAT on behalf of sellers as it was acting as a commission agent. The Department was of the view that that Amazon is liable to pay the tax as the ownership of the good is transferred to the ecommerce company till they sell it. It is something similar to a shopkeeper stocking goods with a buyback clause with the manufacturer that they will give the product back if it remains unsold.
Logic behind the tax authorities demanding tax could be that since Amazon India stores products of more than one kind and that too not in a random fashion but there is some science behind the stockings, there is an element of value addition.
Amazon contented that it is only a service provider providing services of storage, delivery and collection of money for the seller and at no point does it own or sell the product. Subsequently, Amazon collects the money from the sale and passes on the amount to the merchant after deducting its commission. The dealer remits VAT to the government. Amazon further contended that the stand of the department would lead to Amazon violating FDI rules in the country which prohibits FDI in retail.
Further, as per a news report by The Economic Times, the department laid down two conditions to Amazon India, as an alternative to being registered as a dealer. Firstly, Amazon India must disclose details of transactions carried out on its website and secondly, it must take primary liability if a merchant defaults paying VAT on transactions executed on Amazon.
While Amazon has no problem with the first demand, it has declined the second. Perusal of the two conditions implied that Karnataka VAT authorities would want to treat Amazon India as a "commission agent" status, which the online marketplace is not willing to accept in view of federal regulations that will ultimately bar foreign direct investment in online retail.
The tax department also required Amazon to prove, whether VAT for a certain transaction has been discharged, if the department raised a claim. Amazon India executives also argued that their core activity in India is providing modern warehousing facilities for merchants to store products, display and provide a technology enabled online marketplace for those products, and facilitate online sale and receipt payment on the merchant's behalf, among other things. The Amazon executives also argued that each partner merchant of Amazon is a VAT assessee, and is required to remit VAT collected every month. Also, when a merchant on Amazon's digital marketplace pays VAT, he pays only on the value added part of his transaction as he can claim input tax credits on purchases already made. But in the event of a default, Amazon India will not be able to claim input tax credit as it will not have access to a merchant's transaction history, and will have to pay VAT on the full sale price of a product.
The Karnataka Government is now in the process of amending the State VAT law to bring it in line with modern times and include a reference to Ecommerce transactions. The government says the amendment will deal in the marketplace model, which most players have in different measure.
In this model, e-commerce players offer an online platform that retailers and buyers can use to make transactions; the ecommerce players may also offer logistics and warehousing facilities to the sellers. Amazon in India has only a marketplace model, but the same in Flipkart's case is a small part of its overall operations, because most of the sales are done by the company, though through a different entity.
Since the e-commerce players in the marketplace model do not directly sell goods, VAT should not be applicable to them. But a state finance department official said since companies like Amazon offer their platform and services for a commission, "even commission agents have to pay tax''. Under the existing VAT Act, both dealers and commission agents have to pay tax. The state government's amendment is expected to clarify that whether the ecommerce players will fall under that category.
Models in e-commerce selling:
Here it is pertinent to note that the above is just one model of e-commerce. Whether VAT shall be applicable on seller or e-tailer depends upon the model and nature of sale.
The typical e-commerce model of online selling relates to a situation where an e-commerce company provides an online portal wherein the sellers including manufacturers, retailers etc. advertise their products along with product specifications and pricing. A buyer visits this portal and places orders directly with sellers. The e-commerce company thereafter picks the product from the seller’s warehouse and delivers the same to the buyer at his doorstep. The e-commerce company collects consideration from the buyer and remits the same to the seller after deducting a pre-decided amount, from the said consideration towards its service charges.
The common models of e-commerce are listed below-
Model 1: The e-commerce company buys the products in bulk in discount and then sell the same at cheaper price by the help of its online e-commerce platforms. However, this is not a general model as high cost and working capital pressure is involved.
Model 2: The e-commerce company, already owns certain products and sells the same in the name of its own, invoice is also raised in the name of the e- commerce company. In this case, the VAT liability of the e-tailer is same as that of any other offline dealer. Example of such e-tailers are: Yepme.com
Model 3: After getting the order from the customer, the e-commerce company purchases the same from the seller and then further makes a sale to the customer. In this case, the invoice is raised in the name of the ecommerce company, which after deducting the commission, deposits the balance amount in the account of the seller. Thus there is a two phase sale, one from the seller to the e–tailer and other from the e-commerce company to the customer.
Model 4: This is known as market place model where the e-commerce company asks the third party sellers to sell the goods and services by using its platform to the customers who log on the e-commerce company’s platform. The e-commerce company charges commission / delivery charges. Thus, once the order is placed by the customer to the e-tailer, the seller dispatches the goods to the consumer’s address, from its own warehouse. The invoice is also issued in the name of the seller. In this case, the VAT liability is of the seller, where the e-tailer only gets his commission, and pays service tax on the same.
Model 5: This is commonly known as Facilitator Model which is frequently adopted to act as a platform facilitator between the sellers and the buyers. Under this model the e-tailer undertakes to perform packing and marketing / delivery of the goods to the customer. However, the invoices are made at the end of independent sellers directly to the customers. In such a transaction the website acts only as a facilitator and gets a commission for providing the service. The e-commerce company has to pay a service tax on the commission it has collected. There is no question of sales tax or value added tax in such a transaction. Sales Tax/VAT is collected by the seller directly from the customers itself. Similar to the model discussed above, the Invoice too is raised in the name of the seller and not e-tailer. These e-commerce companies merely acts as a mediator.
However, in order to ensure quick availability of products with e-commerce company these sellers are required to amend their registration to include the space/premise with e-commerce Company as “Additional place of business (if already registered with main office”) based on rent / lease/ Service agreement entered into between the sellers and e-commerce Company. From this premises of e-commerce company, all the goods are then gathered, processed / packed and sent for delivery to the customers either independently or vide dedicated courier agencies.
Certainly, the e-commerce companies have developed various ways to predict customer preferences and interpret which products will be in demand and thus, to save time and logistics cost and to earn a little extra money, e-commerce companies store goods which they feel will be in demand in the market. These goods are stored at a warehouse which is called a ‘Fulfilment centre’. This arrangement serves to ‘fulfil’ the demand of the customers at the fastest possible time. The bone of contention between Karnataka Tax Authority and Amazon India {as discussed above} is bringing under VAT purview these type of transactions only.
E-commerce taxability vis a vis Delhi-VAT:
On 26 June 2015, the DVAT Authorities vide Notification No. F.3(515)/Policy/VAT/2015/330-41, in order to cross check the volume of sales reported by these suppliers and payment of VAT, has sought direct information of sales by these suppliers from e-commerce Companies and thereby has prescribed a return, to provide details of dealers located in Delhi, supplying goods either to customers of Delhi or outside Delhi and details of dealers located outside Delhi, supplying goods to customers of Delhi, for the persons engaged in providing facility of electronic shopping (commonly known as e-commerce) through their web-portals, i.e. companies/firms/LLPs/ proprietorship concerns etc. which may be acting as facilitators, directing the transaction to the dealer concerned for supplying the goods to the customer who has ordered for such supply or supplying the goods directly to the customers from the godown maintained, managed and owned by such facilitating entities, where the goods of concerned dealer have already been stored.
Conditions:
1. All such persons engaged in the business of e-commerce like Amazon, flipkart, snapdeal shall have to enrol themselves by logging on to the web-site of the department (www.dvat.gov.in) at first by clicking on the relevant link in the Menu. Basic information has to be filed online in Form EC-I. A unique ID would be generated after successful submission. This ID should be used for filing the said return. Password for logging on to the site would be communicated on email provided by the person.
2. Return should be filed on quarterly basis in Form EC-II & EC-III by 10th day of the month following the quarter to which the return pertains. The first quarter return needs to be filed by 30-09-2015, as extended vide circular dated 21-7-2015.
3. Net sale turnover of a dealer, reducing there from the turnover of the sold goods returned which have been sold during the same quarter shall be reported in the return. The return of a quarter can be revised by the end of next quarter for making corrections for the goods sold in that quarter but returned in subsequent quarter.
Interpretation of Statutory Provisions of DVAT:
A strict interpretation to the definition of Dealer, provides that e-commerce companies are Dealers under Section 2(j) (i) of the DVAT Act, 2004 ignoring the facts that VAT is already been paid by the original sellers on full value of consideration.
It can be said that, as of now DVAT department is not treating the e-commerce companies as dealers under existing law instead it has just prescribed form EC-I, EC-II and EC-III to unearth under reporting of sales by the suppliers who fulfill the online orders. The department aims to achieve the collection of VAT without hampering the atmosphere of trade in the city.
Conclusion:
It is worth noting that the ambiguity regarding VAT liability persists because till date there are no specific laws or provisions governing e-commerce sales in India.
To wrap up the discussion, one can say that if the seller is the owner of the goods, wherein the seller is responsible for issue of invoice and has the warehouse registered in its name, the prime responsibility is of the retailer and not the e-tailer to pay VAT. However, if the e-tailer owns the warehouse, from where the products are dispatched and also issues the invoice in his own name, the liability to pay VAT will emerge on the e-tailer similar to the one who is selling offline.
CS Priyanka Gupta
APRA Associates (VAT Team)
CAclubindia
