With the advent of multiple e-commerce ventures in India, the Government is finding it difficult to adapt its existing rules to meet the requirement of newer kind of businesses – which often uses different structuring jugglery to circumvent the current legal frameworks. More often, certain regressive steps are taken by the government without taking into account how such directives can affect the business environment in the country or a particular state. For example, the recent ban by the Delhi Government on Uber has affected both the commuters in terms of non-availability of the public transport and left thousands of drivers without a job.

Recently, Amazon India landed into a regulatory soup, where the Karnataka tax authorities threatened to cancel the VAT (Value Added Tax) licenses of the sellers who store their products in the warehouse owned by Amazon. Interestingly, this was not an issue related to evasion of tax, but a clear case of mere interpretation of the law – on who is liable to pay for the tax. Such strict interpretation of law may destabilize the business model of Amazon – how it works and may become onerous for it to continue further business in India or atleast in Karnataka.

The Amazon business model

Before we analyse and interpret the legal provisions which deals with the case, it is important the Amazon’s business model in India. In India, Amazon, it operates under the URL “www.amazon.in”. Amazon identifies itself as an online platform and a facilitator between the sellers and the buyers, and in no way control the transactions that happens in the parties. Amazon to comply with the FDI regulations in India, does not buy the goods directly from the seller, but merely provides an online platform to display the goods. Once, a buyer purchases a good, Amazon will inform the seller about such purchase, either the seller has the option to use its own logistics to deliver the product or can choose the logistics services provided by Amazon.

Amazon also provides a service called “Fulfilled by Amazon” program, which constitutes 75% of the sales of Amazon in India. Under this program, the seller would store its products in one of the warehouses provided by Amazon, to reduce the delivery time. Amazon would use state of the art technologies, including data-mining and critically anlayse the available data to predict the popularity of certain products and store the same in the warehouse to have a quick turn-around time in providing the services to the client.

In both the case, Amazon would collect the money from the buyer, take a percentage of the sells proceeds as commission or providing the service, and would return the rest to the seller. In turn Amazon would pay Service tax to the Central Government and the sellers would pay the applicable VAT or sales tax directly. This issue has been previously clarified by an advance ruling by the tax authorities dated August 24, 2012 where it was held that Amazon “is providing an online retail distribution channel and the associated logistical services” and thus clearly providing services.

The tax issue in Karnataka revolves around this “Fulfilled by Amazon” service, where the Karnataka state authorities are claiming that Amazon should register itself under the state’s VAT laws and pay appropriate tax as applicable directly.

What is VAT?

Value Added Tax (VAT) is a state level tax that is charged on the value that is added to the goods before selling to the ultimate consumer. Example a person is preparing bread he sells the same to a distributor who packs the product and sells it to the customer. In this case the tax will be charged on the selling of unpacked bread (value added to common wheat) and on the packing (value added to the bread). The government charges tax on every value added to the product before it comes into the hands of the customer. Almost every state has a similar law in place on value added tax.

Legal analysis

The tax authorities slapped notice on the sellers who have listed Amazon warehouse as an additional place of business. Though, there is not rule fixing the limit on a maximum number of vendors that can register in a warehouse, a complete reading of other provisions of the law would reveal that such a registration need to manned by certain requirements in terms of having a separate place to keep the goods and have provision to display notice boards outside the premises of the warehouse. However, in case of Amazon, to optimize distribution, it would keep similar products belonging to different sellers at the same place, for example, a headphone of the same brand belonging to different sellers can be stored at the same place.

Moreover, the tax authorities are claiming that Amazon is acting as a dealer and is liable to pay VAT as per the provisions of the Karnataka VAT Act, 2005, as it is not merely a service provider but is providing value addition in terms of state-of-the art data analysis and prediction systems which helps in storing and arranging the products and is also acting as a commissioning agent as per the Karnataka VAT Act. However, Amazon has categorically stated that they are not a dealer as the legal ownership of such products is not transferred to Amazon and is merely acting as a service provider to provide fast delivery to the buyers.

Now if we analyze the position of Amazon as per the definition given, it seems to qualify as a dealer as Amazon is distributing the goods on behalf of the sellers. However, it seems like the tax department has overlooked the principle of “noscitur a socii”, where the terms “supplying and distributing” should be read taking into account the other adjacent words in the sections which would clarify the true meaning of the applicability of the provision.

Interestingly, going by the FDI rules, a foreign entity cannot engage in retail trade in India. So, if Amazon is identified as a dealer, it would not be able to continue its business in India.

The core issue to be understood out there is no tax evasion, but a mere case of who is liable to pay the tax. In the present case the government is getting the full tax, but it is only paid by the seller. The contention of the government is that it is Amazon who should be paying the taxes and not the seller. Government should consider amending its existing rules to meet the requirement of new industries like e-commerce sector and can have relevant guidelines in place, to avoid tax evasion.


The issue is basically because of the self-contradicting laws and loop holes in the same. There are many amendments lying before the various competent bodies. These amendments are of huge importance before the laws are very old and the scenario of E-commerce has grown big and complex. With the adamant of Foreign Direct Investment (FDI) in India things have become very complex and the obsolete laws are causing great difficulties. The above issue is yet to be resolved and is classic example of what happens when one has self -contradicting laws and is not changing with the pace with which its subject is changing.

 (with inputs from Mridul Gupta, a student of UPES)


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