Karnataka’s e-commerce tax will fall flat in court: Experts
BENGALURU: The Karnataka tax department’s recent proposal to e-commerce firms, considered a face-saver, may not be legally tenable, tax experts said citing High Court and apex court rulings.
The Karnataka commercial taxes department, last week, asked e-commerce firms including Amazon, Flipkart and Snapdeal to deduct 1% of the money payable to merchants towards tax.
The department suggested that the websites remit the taxable money to it, and the dealers could later claim credit or refund on this amount while discharging their value-added tax, or VAT, liability.
Thousands of merchants sell on online marketplaces such as Amazon, which earns a commission on the sales. As it stands now, VAT authorities in Karnataka have refused to recognize Amazon India on the grounds that it is not a registered dealer under VAT laws, and have been refusing branch certificates to dealers wanting to do business with the online marketplace.
“When Amazon India is not even a registered dealer, how can the tax authorities ask it to deduct taxes payable by a registered dealer,” asked a senior tax expert.
The new formula “may not be the right way to handle things,” said V Madhu, former commissioner of commercial taxes, adding that VAT laws require a dealer to pay taxes on the goods sold.
“The e-commerce platform, if asked, must disclose all transactions carried on its portal to the tax authorities and help them check any tax evasion by dealers trading through the portal. If the portal does not want to disclose the names of dealer, then under the VAT laws, it should be deemed as a seller,” he said.
Another former tax commissioner, BA Harish Gowda, said e-commerce websites are only facilitators of trade.
“Amazon India, for instance, is not an entity which falls within the definition of dealer under the VAT laws as it neither buys goods nor sells. On the other hand, it facilitates trade through its portal. So the question of Amazon deducting 1% tax and remitting it to government will not be in accordance with the law,” he said.
The latest formula is seen as a face-saving exercise by the tax department, which will not earn a single rupee of extra tax. While VAT officials argue that the tax deducted at source will help them monitor online transactions, Maharashtra and Gujarat do this by asking e-commerce companies to disclose the transactions made on their platforms, said experts.
The Karnataka High Court in a case involving Larsen and Toubro struck a provision in the Karnataka Sales Tax Act, 1957 that required government agencies to deduct a certain percentage of tax before making payments to a private contractor handling a government project, tax experts pointed out.
The court ruled that tax authorities cannot claim tax at source without quantifying the liability of the dealer (contractor). The Supreme Court, too, has barred excess deduction of taxes at source by tax authorities, the experts said.