May 28, 2015

VAT Department on Tax Evasion by E-Commerce Companies

India is seeing drastic change in shopping habits of the people, the result of which is the growth of E-commerce companies in India for the past 5 years. The E-commerce giants like Flipkart, Snapdeal, Amazon, Myntra etc and various small start-ups are showing great numbers in their sales figures. People are getting more and more attracted towards online shopping and use of Shopping apps has just added more spice to the E-commerce Industry.

The Selling rates which are provided by these online portals are Un-matchable by our conventional retailers and stores. There are various reasons which contribute to such a rate difference but in some cases the difference is just what these company shows but in reality there aren't.

With the change in technologies and business methods there are always some legal glitch (or we can say a lot of) which arises to these new Industries. The most important problem which are arising now a days and for which many online retailers and manufacturer are asking question on is of "Tax Impact". What taxes are applicable on the industry whether it is VAT or CST or Service Tax.

The Impact of Tax on these companies depend upon the model on which they work.There are various models in which these companies are working, we have prepared a small list below (the list is not exhaustive):

    • Produce the goods, display it in the E-commerce market place and sell it to the final consumer.
    • Purchase the goods from Manufacturer and Wholesaler, display it in the E-commerce Market place and sell it to the final consumer.
    • Prepare a group of Retailers, display there product in E-commerce Market place and Sell it to the final Consumer.
    • Prepare a group of Retailers, collect there goods in E-commerce Warehouse, Display the products in the E-commerce marketplace and Sell it the Final consumer.

    In all the above 4 examples, an E-commerce can act as the Seller, Warehouse or Just a Facilitator for the Buyer and Seller.Now the final Sale receipt is collected by these E-commerce companies and the same is distributed to the Seller (if any) and to the other intermediaries. These various steps makes it difficult to know who the actual seller is, who are the service providers and on what amount each should pay there share of taxes. This is the reason why there are so many problems. There are various rules in both Service Tax and Sales Tax which helps to calculate the tax but at the same time there are also various ambiguities, loop holes and other differences of opinions which doesn't allow correct collection and payment of Tax.

    Recently Uttar Pradesh VAT Department had issued a circular, in which Employees of State VAT Department are instructed to point out Online retailers and warehouses and get them registered with the department. The circular is also not very clear but provides an indication to the E-commerce industry to get ready for correct taxation mechanism. Below is the copy of the circular as provided by the department:

    The matter is of utmost importance and a governing body should be established by the government to regulate the E-commerce Industries and also to show them the correct Tax mechanism.

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