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How “Entry Tax” is stopping the Growth of E-commerce Startups

For a country pitching initiatives like “Startup India” “Digital India”, the Entry taxes imposed by various state governments is a step back.The trend of starting taxation without understanding the implications or industry growth is bound to have long-term impact on the e-commerce industry in India.

Monday June 20, 2016,

7 min Read

Recently, Amazon took Gujrat Government to Gujrat High Court for the entry tax imposed on e-commerce products delivered to cities in Gujrat.

As per the rule, the goods which are bought from outside the state of Gujrat will be levied an additional tax.

Flipkart has already filed a case against the “entry tax” in many other states.

Gujrat is not the first or only state to have jumped into the entry tax bandwagon.

State of Orissa, Uttarakhand, Uttar Pradesh, Mizoram, West Bengal already have rules to charge e-commerce companies additional taxes for “delivering” products to customers in their state.

State taxes (till GST sees the light of day) is a State Subject. i.e, states have the power to modify the taxes they levy in their state.

They can start new taxes, modify existing taxes or remove taxes as per the need of the state.

Which brings us to the question “Why are the e-commerce companies so against the entry tax for e-commerce startups or companies?”

Aren’t they opening a wrong battle front with states on taxes, which are at the discretion of start government?

The problem stems from the fast paced growth of e-commerce market in India in last few years.

The unexpected growth took everyone (including governments) by surprise.

When e-commerce boom started in India, none of the state governments had thought in their wildest of dream on the growth this sector will witness in coming few years.

The retail e-commerce sales in India have grown from 3.59 billion USD in 2013 to USD 5.9 Billion in 2015. The number is expected to touch USD 17.52 Billion by 2108. 

The estimated number of internet users in India stood at 354 Million in 2015. 

60% of internet users in India visit e-commerce websites.

Now any market which commands such a huge revenue share, with such a fast paced user growth cannot be ignored by any government.

Government’s started designing rules to keep a tab on the business done through e-commerce sector.

This is where the vote bank politics entered.

The hatred for e-commerce industry by the offline retail segment is no hidden secret.

They are the ones who have felt the maximum brunt of e-commerce sector.

Sales have dwindled.

Rentals are as high as ever.

Thereby, putting a severe dent on their profit margins.

At the end of the day, e-commerce companies do not vote for political parties. Shopkeepers do.

The lobbying had already started to control the e-commerce industry from eating into the profits of shopkeepers.

Since the state governments cannot stop e-commerce companies, they modified their taxation policies to tax e-commerce companies.

Deep down everyone knew, the e-commerce industry running on wafer thin margin cannot afford to allow more taxes to eat the “little” profits they are making.

Some of the state Governments might not earn a fortune by levying additional taxes on e-commerce companies but they are adamant to do so to protect their vote bank

Take the case of Himachal. The recent entrant to “the entry tax” club.

As per Excise and Taxation Minister Parkash Chauhdary, the Bill includes provisions to tax as it was providing “uneven” playing field for local businessmen and also causing revenue loss to the government. (source : Pix8)

I am sure Himachal is not one of the biggest markets for e-commerce industries.

Still they had to make a point to e-commerce companies by levying an additional tax on them.

Why does e-commerce Sector Cry Foul?

E-commerce industry in India has a problem of its own.

The last one year has not been the best of years for startups in India.

Fund have dried.

Devaluations have taken place for some of the major brand names ( ).

Future funds are not easily available.

The market, which relied purely on heavy discounting strategy is undergoing a strategy change.

They intend to cut discounts.

Make realistic margins and if possible, talk profits instead of GMVs.

For obvious reasons, they cannot pass the additional taxes levied on them to end users.

The end customers are a spoilt lot today.

The moment they find the retail store next to their home is selling stuff at par with what their favourite e-commerce is selling at, they will shift loyalties.

It’s a dilemmatic situation for e-commerce industry,

The e-commerce industry also claims to be only a facilitator or a marketplace in between buyers and sellers.

"We are mere intermediaries in the value chain and, ideally speaking, we should not have been taxed," said a senior executive of one of the largest e-commerce firms. "E-commerce companies are organised entities, so instead of chasing multiple sellers it is easier to find the e-commerce companies. They are catching the easiest neck," the person said. (source : Economic Times)

How such policies affect startup space?

Till date, the e-commerce companies paid service tax on behalf of their facilitation role in between buyer and seller.

While the seller paid the taxes (VAT, etc) as per state rules.

The rules and definition of all parties involved in e-commerce sector were clearly defined.

They were a part of the service industry and sellers a part of the retail industry.

Having been a part of an online store selling on snapdeal, I can tell you with confidence the structure is well placed.

The state governments have decided to play party spoilers to earn some extra tax and strengthen their vote bank.

By taking such a regressive step, they are playing antagonists to the startup story of India.

Are they way across the line, when they bring unwanted taxation structures?

Imagine, what would have happened if similar tax structure was implemented in a sector which represented the majority.

The government would have witnessed strikes by now.

We saw what happened when the government bought a rule to levy some tax on jewellers.

Today, if the shopkeepers are threatened by a disruptive model of e-commerce.

Tomorrow, someone else might get affected.

Startups are supposed to change the way businesses are done.

Can Government act as “A Big Brother” bringing protectionist policies to protect one part by levying extra taxes on other parties?

Delhi Government has already picked a battle with online taxi aggregators by stopping them from using surge pricing.

I think, the government is way out of line when they use populist measures to kill a business model.

The startup Industry will suffer, if the government continues with such mindset.

The Impact:

Our Governments don’t bend easily.

They know e-commerce companies are heavily funded.

When they can afford to shell millions on customer acquisition. 

Why cry foul if state government ask for “the share” of funding through the entry or whatever tax?

The taxes leave e-commerce industry with only two choices:

a. Pass the additional tax to end consumer. A move which is sure to backfire on them.

b. Bear the tax themselves. Looking at the current e-commerce industry growth, I am not sure of the viability of the move.

c. Take states to court. They have already started taking start governments to court.

For a country pitching initiatives like “startup India” “digital India”, the undue taxes started by state governments is a step back.

The trend of starting taxation without understanding the implications or industry growth is bound to have the long-term impact on the e-commerce industry in India.

At the end of the day, businesses are started to make profits.

Companies might wait for few years to see the “+” sign at the end of their balance sheets but they will not wait for eternity to make profits.

Tomorrow, they will fire staff. Shift to a smaller office and take steps, which will impact other sectors such as job market, real estate market, etc.

Will government change policies if job seekers come on road demanding roll back of the “entry tax” as the startup has decided to close a customer care to maintain their “profit” percentage?

The real loser here is the Indian Consumer, who has had a plethora of options to buy sitting at home through e-commerce Industry.

I hope the state government’s see beyond their vote bank and roll back “The Entry tax”.

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