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Mint reported on 15 September that Karnataka’s tax department stopped Amazon India from selling electronics and several other products from its warehouse in the state by cancelling the licences of more than 100 third-party merchants that work with the local unit of the company. Photo: Bloomberg
Mint reported on 15 September that Karnataka’s tax department stopped Amazon India from selling electronics and several other products from its warehouse in the state by cancelling the licences of more than 100 third-party merchants that work with the local unit of the company. Photo: Bloomberg

Amazon sellers get Karnataka tax dept notices

State tax department practically bars sellers from doing business with online retailer Amazon

Bangalore: Despite pressure from business lobbies and from the Karnataka government itself, the state’s tax department has issued notices to more than 40 sellers that work with the Indian arm of Amazon.com Inc., practically barring them from doing business with the e-commerce retailer, two people familiar with the matter said.

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

Mint reported on 15 September that Karnataka’s tax department stopped Amazon India from selling electronics and several other products from its warehouse in the state by cancelling the licences of more than 100 third-party merchants that work with the local unit of the company. Those notices were served in July and August.

Amazon declined to comment. An email sent to Karnataka’s tax department went unanswered.

Following Mint’s report, business lobbies as well as Karnataka government officials, including chief minister Siddaramaiah, asked the tax department to “go easy" on Amazon’s sellers.

However, more than 40 sellers have received notices from the tax department over the past 15 days ordering them to stop storing their products in Amazon’s storehouse near Bangalore, the people cited above said. The notices say these merchants cannot register Amazon’s warehouse as their “additional place of business".

To be sure, the number of notices issued by the Karnataka tax department have decreased over the past 15 days. Still, the sellers who received notices this month include some of Amazon’s largest sellers, as was the case in July and August, the people cited above said.

The Karnataka tax department is working on ways to amend regulations so as to specifically address e-commerce, which currently does not find a specific mention in the tax laws of Karnataka 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.

The tax issue in Karnataka is that the regulator wants Amazon, Flipkart and others to pay VAT on third-party goods that are stored in their warehouses even before customers have ordered these products. Currently, third-party merchants pay VAT on all transactions.

The amendments currently being proposed will seek to remove ambiguity about the tax liability of marketplaces such as Amazon and Flipkart, the people cited above said. The tax department is yet to send its final recommendations to the government about this issue, the people said.

“The recommendations may make it clear that marketplaces will have to bear tax liability under the ‘fulfilment’ model. However, the department is still considering the recommendations and hasn’t taken a final call yet," one of the persons cited above said.

But the move by the Karnataka tax department has primarily affected Amazon as it owns a warehouse 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 people cited above said.

Flipkart, run by Flipkart India Pvt. Ltd, did not respond to emails seeking comment.

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

India doesn’t allow foreign direct investment 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 site 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 VAT to the state government.

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 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 said.

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

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