Bangalore/New Delhi: Tax authorities in Karnataka have stopped Amazon India from selling electronics and several other products from its warehouse in the state by cancelling the licences of third-party merchants that work with the local unit of the world’s largest online retailer, according to three people with direct knowledge of the matter.

They asked not to be identified because they aren’t allowed to speak with the media on this issue.

The merchants that received these notices include many of the top sellers at Amazon Seller Services Pvt. Ltd, the official name for Amazon India. Some of the merchants, which are primarily small- and medium-size businesses that sell electronics, apparel, books, toys and other items, also work with e-commerce companies Flipkart and Snapdeal. These merchants have been forced to stop supplying to Flipkart in Bangalore.

The move by the Karnataka tax department has primarily affected Amazon as it owns a storehouse in the state. Snapdeal doesn’t own storehouses in Karnataka, while Flipkart’s largest seller WS Retail, which generates more than 85% of the site’s sales, has not been served with a notice, the first person cited above said.

“Amazon India’s expenses in Karnataka have significantly increased as it has had to source products from its warehouses in Delhi and Haryana to deliver to customers (in Karnataka)," the second person with direct knowledge of the matter said.

Flipkart, run by Flipkart India Pvt. Ltd, did not respond to emails seeking comment. Emails to the commercial tax department in Karnataka also went unanswered.

An Amazon India spokeswoman said the company has been working with the relevant authorities in Karnataka to address their concerns.

“We understand this to be a case where the laws have not kept pace with the new-age online business models that enable a faster, convenient and nationwide access to customers for sellers, especially small and medium businesses, at significantly low costs. We look forward to an early resolution in order to avoid closing our local warehousing operations in Karnataka and to stay on course for bringing more investments in the state," the spokeswoman said in an emailed statement.

The Deccan Herald newspaper had reported earlier that Amazon is at “loggerheads" with tax authorities in Bangalore.

Amazon, which recently announced it would invest as much as $2 billion in India, said on 28 July that it was opening five new fulfilment centres—or storehouses—in Haryana, Delhi, Tamil Nadu, Gujarat and Rajasthan. The company has one storehouse each in Bangalore and Mumbai.

The Enforcement Directorate (ED) is investigating Amazon India to find out if the company has sold products directly to customers and violated India’s foreign direct investment (FDI) laws, The Wall Street Journal newspaper reported on 5 September.

The Karnataka tax department is helping the ED on an informal basis with the probe, one of the people cited above said.

“We don’t comment on regulatory issues. Amazon.in, a marketplace platform operated by Amazon Seller Services Pvt. Ltd, is in compliance with FDI regulations. We have a continually growing pool of over 10,000 sellers of all sizes using our platform to serve their customers and grow their businesses," the Amazon spokeswoman said.

India bans FDI in direct online retail, so Amazon, Flipkart and Snapdeal operate as marketplaces. Rather than owning products, they host third-party merchants on their websites and customers buy goods on the sites from these merchants.

The issue in Karnataka revolves around the fact that Amazon stores certain products owned by third-party merchants at its warehouse even before a customer has ordered them. Some 75% of Amazon India’s sales volume come through this service, called “Fulfilment" by Amazon. In other cases, Amazon simply picks up products from merchants after a customer has placed an order on its site.

But because Amazon believes its technology can predict customer orders, the company encourages its merchants to store their goods at its warehouses so that it can deliver them much faster when orders are actually placed.

After the products are sold, Amazon collects money from customers, keeps a cut for itself, and gives the remaining proceeds to its merchants. The merchants then pay value added tax (VAT) or sales tax to the state government.

However, the tax department in Karnataka has told Amazon that rather than the company’s merchants, Amazon must pay VAT on the orders it gets under the “Fulfilment by Amazon" service, according to the first two people cited above.

The tax department is stipulating that for “practical purposes", the ownership of the goods under the “Fulfilment by Amazon" service passes on to Amazon, the people cited above said. Tax officials have told Amazon that since the company stores products from thousands of merchants in the same warehouse, it is, in practice, acting as more than just a service provider, they said. For this reason, the tax department wants Amazon to be liable to pay VAT.

Amazon, on its part, disagrees with the tax officials. The company has told the tax department that it is a service provider, and at no point does it own goods.

“Amazon has told Karnataka tax officials that the company does not own the goods at any point and neither does it sell on behalf of any seller. It is only providing services—storage, delivery, etc.—for which it charges the seller. So it is not liable to pay the tax," the second person cited above said.

Amazon has also told tax officials that it is willing to share more information about its tax and other practices, two of the people said.

E-commerce does not find a specific mention in the tax laws of Karnataka or other states because these laws predate online retail. VAT or sales tax is a state subject and hence laws differ from state to state.

“E-commerce transactions have been the biggest headache for any tax authorities across the globe because of the place of supply, who is the dealer, and who will pay the tax," said Amit Kumar Sarkar, a partner at Grant Thorton India Llp, pointing to the sales tax issues Amazon faces in certain states in the US.

Meanwhile, to help deal with tax-related issues, Amazon India is looking for tax analysts. The company has posted job openings on several job portals over the past two months.

“This position will be responsible for providing in-house tax consulting and compliance related to the implementation of various business initiatives, including liaising with the various teams and departments in India. The position will be responsible for ensuring Indirect Tax compliances," one such job description reads.

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