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E-commerce giant Amazon runs into regulatory trouble in Karnataka

16 September 2014

E-commerce giant Amazon, which recently invested $2 billion in India, has regulatory trouble on its hands in Karnataka after some merchants were asked by tax authorities not to store the company's products in warehouses due to a tax dispute, Business Insider reported.

The Enforcement Directorate is investigating whether Amazon India had circumvented restrictions imposed on foreign investors by making direct sales to domestic consumers. The Karnataka government had now served notices to over 100 third-party merchants, who have been directed not to store their products in Amazon's storehouses near Bangalore.

The dispute concerned the quantum of tax Amazon needed to pay on goods sold by third-party merchants and delivered to customers directly from its Bangalore warehouse.

Since foreign direct investment in e-commerce is not allowed in India, companies like Amazon and Flipkart operate as market places, where they host third-party merchants instead of owning the products.

The warehouses, also called fulfilment centres, store millions of products of different sizes across several categories sent by sellers from all over India. The shipping of the order is done by Amazon.

Even as the matter is under investigation by the Enforcement Directorate, the tax authorities had cancelled the licenses of several third-party merchants and stopped them from selling their products via the e-commerce site.

A number of these merchants also had tie-ups with other e-commerce platforms like Flipkart and Snapdeal, and had been ordered to stop supplying products in the state.

The tax issue is regarding the ownership of the products stored at Amazon's warehouses. According to the authorities, the ownership of a product is passed on to Amazon the moment it reached its warehouses, and thus it was the company that needed to pay VAT, and not the merchants, Mint  newspaper reported.

Amazon, however, counters this saying that at no point does it own the product, rather it only offers storage and delivery services to third-party sellers and should therefore not be liable to paying any kind of tax.

The Mint report quoted an Amzon India spokesperson as saying it understood this to be a case where the laws had not kept pace with the new-age online business models that enable a faster, convenient and nationwide access to customers for sellers, especially small and medium businesses, at significantly low costs.

He added, the company looked to an early resolution in order to avoid closing its local warehousing operations in Karnataka and to stay on course for bringing more investments in the state.

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