Common sense seems to have prevailed in the ongoing clampdown of Karnataka Tax authorities on dealers selling their products on Amazon marketplace. Just two days back, news had surfaced that Karnataka tax authorities have sent notices to over 100 sellers and had stopped them from selling their products that were stored at Amazon’s warehouse near Bangalore.
According to ET, Karnataka Govt has asked it’s tax authorities to go easy on the Amazon sellers until such time that an amicable solution was arrived on various points that are in contention.
ISN Prasad, principal secretary of the finance department, told ET, “ There have been certain issues flagged to us, and we are trying to sort them out. Until then, we have asked the Commercial Taxes department to review the matter on cancelling the ‘branch certificates’ issued to dealers,”
It seems that Amazon has threatened to move its warehouse out of Bangalore if the confusion has persisted, which indirectly would reflect very badly on the local Govt. Infact, Govt seems to have taken lead to accommodate these new age businesses for which Bangalore has become a hub. ISN Prasad, who was earlier Principal Secretary to the CM has said, “We will come up with options, not just for Amazon, but to all companies doing online business to help them comply with Karnataka VAT laws. We are even prepared to propose amendments to rules or the law, as the case may be, for smooth operation of e-commerce activity in Karnataka”
The point of contention
As we pointed out in our earlier article, the point of contention remains as to who pays the value added tax for the goods stored in Amazon Warehouse and “fulfilled by Amazon”. For all the products that have “Fulfilled by Amazon” tag are essentially shipped by Amazon themselves. For this to happen, third party sellers have to store products at Amazon warehouses even before a customer has placed the order with Amazon. Three-fourths of the orders placed on Amazon are fulfilled by Amazon.
After the products are sold, Amazon gets paid from customers and then pays it to third party merchant after they have deducted their cut. The merchants then pay Value Added Tax (VAT) or sales tax to the government post that.
Generally, the ownership of products that come under “Fulfilled by Amazon” is passed to Amazon after the merchants delivers it to Amazon warehouses. So, Tax authorities for “practical purposes” want Amazon to pay the VAT rather than the third party merchants.
On the other hand, Amazon has disagreed with authorities and said that they never own any of the products and should not be asked to pay taxes on those goods. Amazon has also told authorities that they are just providing storage and delivery services to third party sellers and hence should not be liable to pay any kind of tax.
Our Take
In our view – the issue raised by tax authorities does not have too much merit. While I am not a tax expert, one thing is clear that Tax department is collecting proper taxes, just that it is from sellers. eCommerce business (especially marketplaces) operate much differently than what normal brick and mortar businesses operate. Online stores have to be agile in every way and hence they have to take steps that do not fit in traditional business practices.
Amazon will never be able to give their “next day service” if they do not store their merchant’s products in their warehouses (before order is placed), nor will they have any control over logistics if it is given to third party courier service. To add to the problem, the products are sold by third party merchants. This kind of scenario is quite rare in traditional businesses.
The tax laws that have been drafted previously have never taken these kind of scenarios into consideration, and traditional laws cannot be applied here.
The best thing forward in our view would be to come up with new tax laws that keep up with the changing times and in the meanwhile, eCommerce sites like Amazon should be given certain leeway rather than trying to catch them with outdated laws.
Would love to hear reader’s comments on this!
[…] silver lining though is that Karnataka Government has asked the Tax authorities to go easy on eCommerce sites until such time that an amicable solution is arrived on various points that are […]