Amazon gets a breather as Karnataka halts clamp-down on its vendors

The Karnataka government has asked the state tax department, which recently launched clamp-down on a bunch of third-party vendors of Amazon India over alleged violation of current tax norms, to halt the action and review the proceedings, according to a report by The Economic Times citing a top state finance authority.

"There have been certain issues flagged to us, and we are trying to sort them out. Until then, we have asked the Commercial Taxes department to review the matter on cancelling the 'branch certificates' issued to dealers," ISN Prasad, principal secretary of the finance department, told the newspaper.

The state tax department had earlier cancelled the licenses of around four dozen vendors, which were storing their products at Amazon's warehouse, called Amazon Fulfilment Centres, near Bangalore.

Tax officials had earlier argued that merchants cannot register Amazon's warehouse as their additional place of business under the current tax laws. The particular issue relates to the tax liability, as the state tax authorities reckon Amazon is acting as a 'dealer' and needs to pay value added tax.

Amazon contests this and says it is just an online enabler.

The statement by the state mandarin gives Amazon.in, the domestic online marketplace run by world's largest e-commerce company Amazon.com Inc., the much-needed respite since the firm has already invested millions of dollars on the warehouse.

The issue threatens to shake up Amazon's business hub in the state and if it persists it may have to shut its warehouse in Karnataka and move to another neighbouring state.

Amazon has had a history of tax-related issues in its home country the US where offline retailers have been facing a big squeeze with price competition from online sellers like Amazon. Previously, Amazon did not pay sales tax in many states where it did not have a physical space in the US. This allows it to sell much cheaper than offline retailers.

In India, Amazon operates as a marketplace and only provides a platform for other sellers to sell to consumers. It, however, facilitates the purchase process by intermediating in terms of logistics and payment process.

This is similar to many other home grown ventures such as Flipkart, which is now under a Singapore-incorporated entity and is majority owned by its foreign VC investors.

The development is significant not just for Amazon as also for other e-com firms as they could face a similar scrutiny. Besides, other states could start making a similar call for taxation of online product sales.

Amazon launched its e-commerce marketplace in India a year ago. In July, the firm announced that it would invest an additional $2 billion (around Rs 12,000 crore) to support its rapid growth in India. Amazon.in claims that it has more than 17 million products across categories, which would make it bigger (in terms of product SKUs) than seven-year old Flipkart.com, which has around 15 million products. Amazon runs several warehouses across the country, where it stocks the fastest-selling products like electronics.

Recently, Techcircle.in first reported that Amazon.com's founder and CEO Jeff Bezos is likely to visit India ahead of Diwali in October this year. Around the same time, Amazon is also planning to launch its drone-based delivery services in India.

Amazon had recently announced $2 billion investment in India, a good chunk of which is expected to go into building new warehouses.