Nasscom protests proposed 1% VAT on e-commerce transactions

Experts say by asking e-commerce firms to collect VAT, the state tax department is using a backdoor route of collecting tax and improving compliance by sellers

Nasscom has said it will engage with e-commerce companies to make a representation to the Karnataka government to do away with a proposed one per cent value-added tax (VAT) on e-commerce transactions in that state.

“We understand this issue has been raised. So, we will be consulting our members and come out with a detailed representation on this,” said Sangeeta Gupta, senior vice-president, Nasscom. It is learnt at a recent meeting with members of the sector, the Karnataka government proposed the levy of one per cent additional VAT on e-commerce transactions in the state.

Currently, e-commerce marketplace players such as Amazon, Flipkart and Snapdeal fall under the ambit of central service tax and have to pay service tax for the value rendered through the use of their platforms, according to a tax expert. Those selling through these platforms have to pay VAT on the value of the transaction. As such, e-commerce marketplace players and sellers were guided by different pieces of legislation, the expert added.

By asking e-commerce companies to collect VAT, a levy on sellers using their platform in form of tax deducted at source (TDS), the state tax department was using a backdoor route of collecting tax and improving compliance by sellers, tax experts said.

Karnataka has been at logger heads with global e-commerce giant Amazon over taxes on e-commerce transactions and ownership for these taxes. The state has asked Amazon to assume primary responsibility to pay taxes for merchants on its marketplace and register fulfilment centres as additional places of business. Amazon has opposed this.

Due to concern over levies by the state, Bengaluru-based e-commerce leader Flipkart has set up its largest logistics centre in Telangana. Amazon, too, had set up a warehouse in Telangana. A Karnataka government official, however, denied sending any letter of intimation on the proposed levy. But sources in the sector said such a letter was sent a few days ago.

According to a source, at least one prominent e-commerce player has received a letter on the issue of one per cent levy on transactions between buyers and sellers. “The company did receive a letter from the Karnataka government,” said the source.

E-commerce companies have argued as service tax payers, they have no legislative grounds to collect VAT from sellers. “We have advised our e-commerce clients to contest this strongly with tax departments,” said a tax consultant advising several e-commerce players.

Experts say as and when a goods and services tax (GST) is introduced, both goods and services will be taxed under a single legislative framework. This will give more legislative room to state governments to levy service tax, further complicating matters. “E-commerce companies will come under the ambit of a state government’s power to levy service tax under the GST regime,” says Vivek Pachisia, tax partner, EY.

Experts are seeing the imbroglio as a precursor to states playing a more proactive role, brining e-commerce companies under their tax net.