Budget 2020 | Will the government introduce e-commerce tax?

As the government’s coffers come under stress, it mulls introducing MAT on e-commerce giants

“Amazon isn’t doing India a favour by investing a billion dollars,” said Union commerce minister Piyush Goyal during Jeff Bezos’ recent India visit, surprising everyone from multinationals and India Inc. But the snub to the biggest company in the world wasn’t exactly impromptu. The minister’s contention is that the Amazon founder’s $1-billion largesse was about funding losses in the Indian online marketplace venture, as a result of aggressive discounting and unfair competitive advantage. That the world’s richest man, estimated worth $115 billion, had to wind up his India trip without a courtesy visit to top government ministers was glaring, considering that Amazon has invested over $5.5 billion thus far in the country and has the second-largest workforce in India after the US.

The belligerence stance of the government is also an outcome of the fact that while the online retail market in India has touched $200 billion (gross market value) in 2019, the Confederation of All India Traders (CAIT) has been crying foul against Amazon and Flipkart. The confederation has accused the ‘unholy’ cartel or nexus of e-tailers along with brands for predatory pricing and deep discounting. In a letter to Goyal, the traders’ body had urged the government to direct the ‘economic terrorists’ to embrace the foreign direct investment policy — in letter and spirit — or exit their operations in India. Goyal, who is also a member of the Swadeshi Jagran Manch (SJM), the economic and policy think-tank of the Rashtriya Swayamsevak Sangh, has been very receptive to the traders’ demand. It may seem political since the BJP government is pandering to an important vote bank of traders. But the rewards could be far greater than just political. According to a Deloitte India and Retailers Association of India report, the country’s e-tail industry is expected to cross $1 trillion in 2021, compounding growth at a rate of over 38% and catapulting India as the third-largest consumer market globally. That’s too huge a tax-generating opportunity for the government to ignore. Just imagine the kind of revenue that the exchequer could churn from the booming e-commerce segment.

No wonder then that the Centre has already slapped an ‘equalisation levy’ on 12 digital services, including online advertisement as a separate chapter in the Finance Act, 2016. In the current fiscal, the Centre has raised Rs.8.87 billion through the levy. This takes the cumulative collection under the tax head since inception to around Rs.30 billion, according to reports. Interestingly, in October, the Organisation for Economic Co-operation and Development had put out a draft on taxing digital companies. Even as member countries are discussing possibilities, in the 2018-19 Budget, the Indian government proposed to amend the Income Tax Act to tax digital entities with a large user base or significant economic presence in the country.

In fact, at the G20 summit last year, finance minister Nirmala Sitharaman had strongly supported the potential solution based on the concept of ‘significant economic presence’ (SEP) of businesses in a country. The government has already introduced the SEP in the I-T Act through the Finance Act 2018. By widening the ambit of the definition of 'business connection,' the government would be able to tax global consumer tech companies such as Facebook, Amazon, Alphabet (Google), Netflix, and Twitter.

Outlook Business has learnt from Ashwani Mahajan, the national co-convenor of Swadeshi Jagaran Manch, that the SJM has suggested to the finance ministry to consider taxing e-commerce companies based on their revenues. Incidentally, France and Britain are also looking into a similar proposal. As per The Washington Post, the two countries plan to tax the revenue of digital giants where users of online services are located, rather than where the companies base their European headquarters or book their earnings. France is seeking to impose a 3% levy on companies with a minimum of $845 million in global revenue and digital sales of €25 million. As per the European Commission, global tech companies pay a 9.5% average tax rate compared with 23.2% for brick and mortar firms.

On similar lines, one option under consideration in India is to introduce a minimum alternate tax (MAT) on sales even though MAT is calculated on a company’s book profit (profit before tax) and not taxable income. The rationale behind the revised MAT model could be because almost all e-commerce companies here are loss making. For instance, Flipkart India, which has been operational since 2007, clocked consolidated sales of over Rs.430 billion in FY19, but losses stood at over Rs.170 billion. Similarly, Amazon Seller Services, which began running the Indian e-marketplace since 2013, clocked revenue of over Rs.70 billion in FY19 and incurred losses of close to #60 billion. "Even as losses have increased, valuations have skyrocketed for the companies," points out Mahajan.

The government believes that if it weren’t for the predatory and aggressive discounting, these e-commerce giants would not incur such huge losses. Currently, MAT is levied at 15%, but the North Block may consider a lower levy if it were to tax the revenue of only loss-making platforms. Goyal had expressed the Centre’s concerns when he mentioned that it "certainly raises questions, where the loss came from. These are real questions which need answers and I am sure the authorities who are looking at it, seek those answers."

Whether Sitharaman will introduce the MAT proposal in her Budget for FY21 is not clear, but what’s definite is that taxing times are in store for online retail businesses. The bigger worry is even food-tech companies could come under the ambit, as the ‘Press Note 2’ issued by the Department of Industrial Policy & Promotion in December 2018 defines e-commerce not just as buying and selling of goods over a digital network, but also includes services.

The Centre is clearly grasping at straws as it is on to course to miss direct tax collection target of Rs.13.5 trillion for FY20. It has only managed to raise Rs.7.3 trillion till now. But in its desperation to raise funds, the government runs the risk of vitiating an already morose business environment.