Taxing sellers on e-commerce platforms can drag economy further

The Centre’s proposal to impose a tax on third-party sellers on Amazon and Flipkart may have far-reaching consequences, not just for the e-commerce players but also for other industries.

The government has proposed a 1% tax on each sale made by sellers on e-commerce platforms from April. However, the corporate sector should watch the developments keenly as it will embolden the government to impose a similar tax on other businesses too over and above the GST, however minimal it is.

While sellers on Flipkart and Amazon have said that the e-commerce industry is too small and will nearly finish of their businesses, Union finance minister Nirmala Sitharaman has defended the proposal claiming that the sellers will offset it later. She told a TV channel that they should not see every tax deducted at source levy as an additional tax.

Taxing times

But problems are deeper, symptomatic of a larger issue. Sitharaman’s defence is, however, par for the course as the government hunts for newer ways to collect taxes which have fallen woefully short of the target because of poor economic activities across the country. According to HSBC, they expect net tax collection to fall short of the budget estimates by ₹2.7 lakh crore largely because of weak economic activity and low tax buoyancy.

Till November or the first eight months of the current fiscal, the government could mop up only about 46% of the tax target, as per data released by the Comptroller and Auditor General (CAG).

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The government because of its inefficiencies or because of the global economic downturn could not collect the required amount and hence is forced to get them from other sources. What better way to do it than impose smaller taxes on the marginalised businesses who don’t have a strong voice to take the government on. More so when the industry itself is held in contempt by the ruling party.

There are two issues being played out here:

1. The government’s desperation to collect taxes from wherever it can lay its hands on.

2. By proposing a 1% tax on sellers, the government is making it clear that those who sell their products on e-commerce sites will be penalised for their very act of onboarding these platforms.

Center’s push

The government has tried various ways to impose its ways on the e-commerce players, especially the big ones like Amazon and Flipkart. Commerce and industry minister Piyush Goyal recently even went to the extent of mocking at Jeff Bezos, the CEO of Amazon and the world’s richest man, who announced during his visit to the country that his company will invest $1 billion in digitising small and medium businesses in India.

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Goyal during an event recently said that Amazon was not doing India any favours by investing $1 billion. He further said that Amazon was investing this money, probably on account of a need to fund losses. “How can a marketplace make such a big loss unless they are indulging in predatory or some unfair trade practices?” he asked.

Backing small and medium traders

The government has been coming down on e-commerce players for their predatory pricing, claiming that it directly hurts small and medium traders who are the ruling party’s biggest vote banks.

But the nature of the beast is such that e-commerce players have no other option but to build predatory pricing into their business to lure customers to shop online. It is a simple business tactic, just as festival discounts are for offline players. Restricting them from selling products at far lower prices than the market price will need major policy changes, and when the government cannot mop up even the required taxes, they should see businesses like these in a positive light.

The government can indulge itself when the economy is performing well, but to do so now can only be seen as an act of bravado and nothing else.