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Stating the case studies from developed countries with regard to taxing the online sales of goods and services, the RBI calls for the need for clarity on taxation of ecommerce sector.
RBI’s recent report on State Finances suggests that the rapidly growing ecommerce sector can boost the state revenue and is “an opportunity and a challenge for states.”
The ecommerce and online business in India is booming in the recent years and is expected to grow exponentially (Goldman Sachs reports a growth rate of 15X to reaching $300 billion by 2030) but the ambiguity on the taxes the ecommerce have to pay remains.
Insights from ‘State Finance- A study of Budget 2014-15’
The issues that are gaining importance in India:
The point of sale in online trade
- In the case of online trading/selling in the business to customer model, the seller is liable to pay both CST and VAT, depending on location of the seller.
- In respect of transactions through e-retailers, there is considerable ambiguity regarding where the sale is deemed to have occurred and hence, in the incidence of tax. This leads to dual tax demand, both at the point of origin as well as at the point of destination.
Issue of tax collection
- Under the marketplace model, e-commerce firms host third-party merchants on their websites and customers buy goods on the sites from these merchants. Thus, the third party vendor/seller is liable to collect the VAT and the online platforms only need to pay service tax on the commission they charge the vendors listed with them.
- The state governments are of the view that these online platforms are inventory-based models as many of the online traders set up warehouses and store goods before any sale has been transacted. Hence, they contend that these online retailers are liable for tax on the sales.
Not under the law
- Various state Value Added Tax Acts and the Central Sales Tax Act, 1956 predate online retail activities and do not cover them specifically.
- Tax rates and rules differ widely across states. Even the definition and treatment of dealers and distributors differ.
- If the vendor/third party is not registered under VAT in the state of destination, monitoring compliance of collection of tax becomes difficult.
- Treating these businesses as inventory-based models and applying local state tax on transactions from local warehouses/distribution centers to buyer.
- Verifying warehouses records to ensure appropriate taxes are being paid.
- Exerting pressure on online sites that do not have warehouses to establish warehouses and distribution centers in their states so that online trades can be easily taxed.
- Verifying details of sales made by major e-retailers in their respective states, asking them to register themselves as dealers in the state and file applicable returns.
- Seeking legislative measures such as amendment to the Central Sales Tax Act to make it easier for the states to tax online retail transactions.
RBI’s take on the issues
- The introduction of goods and services tax (GST) will solve some of the interstate tax problems faced by online sellers, as it is a consumption tax based on the principle of destination which would subsume all the indirect taxes such as CST, VAT and local taxes.
- GST rates would be fixed around the revenue neutral rate, it would prevent wide differences in tax rates across states.
- Centralized filing of returns could reduce hassle for retailers. Transparency and simplification associated with GST should increase tax compliance among online retailers.
- There are, however, downsides too. While large e-retailers would be able to apply software programmes to calculate and levy taxes based on destination, small retailers will not be in a position to bear this additional cost and may restrict their sales to certain geographical areas.
- It is also necessary to explicitly address the issue of treatment and liability of online market-place platforms.