Home / Companies / Maharashtra govt moves against Naaptol, freezes bank accounts

Mumbai/New Delhi: After Karnataka and Tamil Nadu, it’s the turn of Maharashtra to crack down on e-commerce firms in a year that has seen consumers and investors fall in love with online retailers.

Maharashtra’s revenue department has moved against tele-shopping and e-commerce platform Naaptol.com, owned by Naaptol Online Shopping Pvt. Ltd, and has frozen its bank accounts to recover value added tax (VAT) on the sale of third-party goods.

Earlier this month, the tax authority froze multiple bank accounts of Naaptol for non-payment of VAT.

On 16 December, Naaptol filed an appeal in the Bombay high court, seeking an urgent hearing of the dispute to free up its accounts.

The tax department wants Naaptol to pay sales tax of over 23 crore to the revenue authority.

According to Manu Agarwal, chief executive officer of Naaptol, the tax demand pertains to the financial years from 2008 to 2012.

He added that while the state revenue department had first broached the issue with the company two-and-a-half years ago, it is only now that an official notice has been served.

“We believe the department has taken this up now as there are activities going on in other states on e-commerce and marketplace companies. We have legal option from senior counsels and law firms and all of them are of the opinion that the order by the department is illegal," said Agarwal, adding that all the vendors of Naaptol are registered dealers with the sales tax department and pay VAT.

Most e-commerce firms in India operate as marketplaces. Rather than owning the products, they host third-party merchants on their websites, and customers buy goods on the sites from these merchants. Under the current norms, dealers or third-party merchants need to pay VAT on all transactions.

In its plea filed with the high court, Naaptol argued that it was not liable to pay VAT as it wasn’t a dealer “under either of the Acts, namely Maharashtra Value Added Tax Act, 2002 and the Central Sales Tax Act, 1956".

Naaptol currently pays service tax on the commission it charges the vendors listed on its platform, while the VAT is being paid by the vendor on the full amount of transaction (or the sale) that takes place via Naaptol.com.

Earlier this year, Amazon.com Inc.’s India unit also faced tax-related concerns in Karnataka, where the state government stopped it from selling electronics and several other products from its warehouse in the state by cancelling the licences of many of Amazon’s third-party merchants.

Amazon kept a cut of the sales and passed on the rest to the sellers who then paid VAT. The state’s tax department claimed that the ownership of products passed to Amazon when stored in its warehouse, and that the e-commerce company should be responsible for paying VAT.

In October, Tamil Nadu became the second state to take a dim view of the way e-commerce companies that run marketplaces believe they should be taxed.

The action came in a year in which e-commerce took off in India, with online retailers such as Flipkart and Snapdeal raising hundreds of millions of dollars from investors. A November report by Motilal Oswal Securities Ltd projects India’s $11 billion e-commerce market to grow to $20 billion by 2015.

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

In the case of Naaptol, the Bombay high court, without going into the merits of the tax issue, agreed to lift the attachment order of the revenue department on the condition that Naaptol will deposit 10 crore in a separate bank account. The court asked the company to file a separate plea for interim relief against the tax demand before the appropriate court.

“If the appeals are not filed or filed, but no interim orders are passed or obtained by the petitioners (Naaptol), the revenue department is free to recover the sums due and payable in accordance with law and if permissible by attachment of all bank accounts," said a 17 December order passed by a division bench of the high court. Mint has reviewed a copy of the order.

The firm, according to the high court order, has four weeks to file an appeal against the tax demands raised by the department.

“There will be no impact on Naaptol’s business. Overall I do feel such actions will impact business sentiments in India," said Agarwal.

“We are aware of the order of the Bombay high court in the Naaptol.com case and we are keeping a close watch on the case," said a top revenue official familiar with the development who did not want to be named.

Naaptol, which started in 2008 as a price comparison portal, morphed into an online, print and television selling platform in 2009. Now it sells everything from electronics to fashion accessories and lifestyle products.

In April, Mint had reported that Naaptol’s revenue from commissions paid by vendors to sell their goods on the online marketplace was 165 crore in the year ended March.

Around 70% of Naaptol’s sales comes from its television platform. Naaptol buys 12-15 minute slots on several general entertainment and regional language channels and uses these to showcase and sell its products. It currently advertises on 25 channels and in nearly 50 publications across nine different languages.

Experts say the sale tax tussle involving e-commerce firms is a case of a stalemate and will only fuel more litigation.

“The revenue department will have to amend laws to tax marketplace entities such as Naaptol and Amazon. They will have to first expand the definition of dealers to include e-commerce firms and then also change the definition of sales to include entities that represent a seller," said Amit Kumar Sarkar, a partner at consulting firm Grant Thorton India Llp.

“But if the department decides to do so, as an extreme case the amendment may land up taxing newspapers which publish advertisements that represent a seller," said Sarkar.

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