Media Coverage: Mr. Anish Narang (M.D, Karavan Advisory quoted by Bloomberg Tax) : India Plans Offensive Against E-Commerce Tax Avoiders

India’s plans to crack down on tax avoidance by online vendors could raise costs for foreign ecommerce sites as they compete to tap into the country’s multibillion-dollar marketplace. One of the government’s proposals, outlined in Feb. 23 draft policy, would require all foreign e-commerce sites, such as Alibaba Group Holding Ltd., to register as business entities in India, making them responsible for compliance and collecting taxes. Vendors on those sites wouldno longer be able to label their products as “gifts”—a widely abused loophole to avoid paying tax.Agencies would have more power to track e-commerce imports and enforce the rules ,including tougher penalties like the potential to block downloads of noncompliant sites. Thegovernment is accepting public comments on the draft until March 9, and some industryparticipants say they expect it to try to  nish the policy before national elections due by May .Restricting non-compliant apps in India would be the government’s toughest step yet, saidJayanth Kolla, founder of technology consulting  rm Convergence Catalyst. “Denying the digitalproduct access to the Indian market is as thick a penalty as it can get,” he said.

India is joining governments around the world is looking for new ways to shore up tax revenue from online sales, and protecting domestic e-commerce businesses. But analysts sayIndia’s actions could raise costs for companies and slow the growth of platforms like Alibaba’sAliExpress and other foreign entrants to the country as they get up to speed with the new requirements.“It’s costly both in terms of time and money for Alibaba’s vendors, and considering a lot of Alibaba’s vendors are small, cottage industry guys, it will be extremely detrimental for them,”Kolla said. “In the short to medium term, we could see a dip in the volumes and sales of Alibaba.”

Need for Restructuring The draft policy would force foreign companies selling into India to restructure their operations, invest in local infrastructure, and take on added compliance and tax burdens. Amazon and Walmart-owned Flipkart Group are better protected from the changes because they already have local logistics networks in place that allows them to collect taxes on sales. India’s draft policy addresses a wide range of issues in e-commerce, including data storageand privacy, infrastructure development, the need for regulations to address the digital economy; the need to stimulate the domestic digital economy; and export promotion through e-commerce.

E-commerce sites will now have to decide if India is promising enough to justify restructuring their businesses. But, with PwC estimating that India’s market will exceed $100 billion by 2022 from $36 billion in 2017, analysts say they expect many to take on the added requirements.“Their revenues are going to be hit,” said Anish Narang, managing director of Karavan AdvisoryEnterprises LLP, which helps clients with importing and exporting in India. “But then the opportunities are huge.”

“Anybody who is serious about doing business in the country and expects to take home some serious dollars will go ahead and make some token investment,” said Sanchit Vir Gogia, founder of technology advisory firm Greyhound Research. An Alibaba spokesperson declined a request for comment. Alibaba told Bloomberg Tax in January that it had blacklisted 200,000 vendors since September 2018 as part of an ongoing global push to stop sellers from evading taxes on its platform.

“We are currently studying the draft policy and we will provide our inputs during the public review period,” an Amazon spokesperson said. “We look forward to an enabling policy to serveover 4.5 lakh [450,000] sellers and a policy that will allow us to scale up our logistics network,create new jobs and infrastructure.”Flipkart didn’t respond to a request for comment.

Global phenomenon industry groups say the problem of tax avoidance is particularly acute with products coming from China. About 200,000 orders a day are shipped directly from China to Indian consumers, according to consumer engagement group LocalCircles, a sizable portion of which it estimates are classified as gifts.“It’s a global phenomenon,” said Jaijit Bhattacharya, president of the Centre for DigitalEconomy Policy Research, which has advised the Indian government on its draft policy. He said the measures were necessary to create a level playing field for local e-commerce businesses.“Players using the platform are misusing it, and sidestepping regulations.”

Indian companies say they aren’t able to compete with the increase in untaxed products shipped from places like China, because the foreign vendors are able to order products at lower prices. A T-shirt shipped to India from China, for example, should be subject to a total42.8 percent duty, according to the customs department, including a 12 percent goods and services tax.

“If it was allowed to continue, a million sellers of Alibaba could have gotten onto Paytm and could have been shipping products from China to an Indian consumer, evading customs and GST,” said Sachin Taparia, LocalCircles’ founder, who lobbied the government to introduce tougher regulations. That risks displacing the entire Indian e-commerce sector, he said. Paytm is an Indian e-commerce payment system and digital wallet company.

Authorities in Europe and North America are also taking action. Value-added tax fraud anderrors on online marketplaces account for about 10 percent of the VAT gap in the U.K. and theEuropean Union, Her Majesty’s Revenue & Customs estimates, while the U.S. Supreme Courthas ruled that states can hold online marketplaces liable for uncollected sales tax.

To contact the reporter on this story: Benjamin Parkin at [email protected] To contact the editors responsible for this story: Meg Shreve at [email protected]; Bernie Kohn at [email protected]; Vandana Mathur at [email protected]