Entry tax: Killing the e-com unicorns ?
Dated 17th March, 2016
The e-commerce sector in India, the beacon of Start-up India, has been put under severe stress in recent times by state governments driven by a blinkered approach to protecting their tax revenues from the sector. The e-tailing industry in India has grown from $800 million in 2011 to $11.8 billion in 2015. While this rapid growth has been a boon to consumers, both in terms of lower prices and convenience of shopping, state governments are chagrined that taxes on e-tailing sales accrue to the origin state from where the goods are shipped and not to the destination state to which the goods are shipped, i.e., where the consumers reside.
A host of state governments have now started implementing harsh tax regimes, which, if not checked in time, may well end up killing the e-commerce industry.
The most recent development is in Gujarat, where a levy of entry tax has been proposed on goods entering the state through the e-commerce route. The rate of tax, though yet to be notified, is likely to be set equal to the VAT rate applicable on local sales in the state. This is a retrograde step as it imposes double taxation on e-commerce transactions, relative to ones at brick and mortar stores.
Under the current Constitutional arrangements, state VAT cannot be applied to inter-state sales. Instead, they are subjected to the Central Sales Tax (CST), which is levied and collected by the origin state. The tax is applied at the rate of 2% on sales to registered dealers and the local VAT rate to final consumers.
Under the Gujarat proposal, inter-state sales via e-commerce would now be subject to the entry tax, which would be in addition to the CST applicable in the origin state. This is retrograde as it would amount to double taxation, putting e-commerce transactions at a significant disadvantage. The Constitutional validity of entry tax is also questionable as it results in creation of fiscal barriers to free-flow of trade and commerce within the common market of India. Courts have struck down this tax in most instances. In April 2006, in Jindal Stainless Ltd & others versus State of Haryana & others, a five-judge Constitution bench of the Supreme Court held the Haryana entry tax to be unconstitutional. In 2008, the matter was referred to a larger Constitution bench for further clarification, where over 1,000 appeals and petitions are still pending.
The regulatory provisions for the levy and collection of entry tax pose significant compliance and operational challenges for Courier Service Providers (CSPs) who are obligated to collect and deposit the entry tax. The sheer magnitude of e-commerce transactions makes compliance requirements a nightmare for CSPs bringing such goods into the state. The huge volume of paperwork involving waybills, road permits, transit passes, enrolment requirements, etc, impedes CSPs from providing speedy delivery of inter-state consignments. Faced with such mounting double-tax and compliance burden, major online marketplace companies have virtually stopped delivering their products in the states of UP and Uttarakhand.
The e-commerce companies are eagerly awaiting the implementation of GST, as it would bar the levy of retrograde taxes such as the entry tax and Central Sales Tax (CST). Under GST, the tax on e-commerce would accrue to the state where the goods are consumed.
The delicious irony of the Gujarat tax proposal is not lost on tax analysts. To protect its revenues as a ‘producing state’, Gujarat has been insisting on continuation of the CST @1% on inter-state supplies from it (i.e., exports to other states), a proposal which has found place in the Constitutional Amendment Bill on GST tabled in Parliament. Now, as a ‘consuming state’, it is demanding the payment of entry tax on inter-state supplies to Gujarat, (i.e., imports from other states into Gujarat). Application of consumption taxes on both exit and entry of goods is contrary to the basic principle of destination-based taxation.
It is for this reason that all such taxes should be abolished under the GST. In addition to creating a common market, GST would end diverse regulatory requirements such as state waybills and transit forms for inter-state movement of goods. It will also enable warehousing strategies based on logistics requirements instead of tax arbitrage considerations.
By levying an entry tax on e-commerce, Gujarat and other states are guilty of running with the hare and hunting with the hounds. The proposal for the 1% origin tax and the recent destination-based entry tax are purely driven by narrow revenue considerations. The states would be well served to take a considered view of the broader economic impact of their taxation policies. Instead of short-term measures such as entry taxes, they should promote early adoption of GST and, in the interim, desist from measures that would kill the unicorns.
(This article is published in The Financial Express on 17 March, 2016)