New tax tangle for e-commerce firms: Karnataka proposes a 1% levy on payments by buyers to sellers

  • Amazon India, Flipkart and their rivals could soon face tax complications with Karnataka proposing a 1 per cent levy on payments by buyers to sellers on ecommerce sites, a move that could encourage other states to follow suit.

  • The planned levy, in the form of value-added tax deducted at source1
  • Amazon India and Flipkart have fulfilment centres in Karnataka. Goods supplied by producers are kept in these centres before being shipped to customers. The two companies also have their head offices in Bengaluru, suggesting that the bulk of their business could be impacted by any such levy
  • 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.
  • The state says the levy will help keep tabs on the revenue of sellers, who would be able to claim credit for the tax. The authorities feel this will ensure that disclosures are accurate and companies are paying the right amount of tax, said one of the persons cited above.
  • Tax experts said such a levy would increase the compliance burden on the companies.
  • Taxation of ecommerce companies has been in focus for some time, particularly after Karnataka questioned Amazon’s fulfilment centre model and sought to impose value-added tax on goods sold through the site, treating it as a commercial agent, a characterisation that the company has rejected.
  • Taking a cue from this, states such as Uttar Pradesh, Kerala and Delhi have sought to increase scrutiny on marketplace ecommerce platforms and made disclosure of monthly sales data mandatory for vendors registered with them.
  • Most ecommerce sites are structured as marketplaces that facilitate trades between buyers and sellers to stay in compliance with overseas investment rules. India does not permit foreign investment in business to consumer (B2C) ventures.
  • With ecommerce growing at a rapid pace in the country, state governments do not want to lose out on revenue. In most cases, invoices issued for online purchases show taxes levied, but states are not willing to take any chances as these companies have complex delivery structures.
  • Marketplace firms have argued that they only facilitate sales and are not sellers themselves, so they shouldn’t be dragged into the tax net.
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