Third party merchants who have been working with Amazon have received notices from the Karnataka government tax authorities to stop storing their products in Amazon’s storehouses near Bangalore. The government has also banned Amazon from selling any electronics and other products from its warehouse in the state. The notice says that these merchants cannot register Amazon’s warehouse as their “additional place of business”. Amazon’s merchants who work with Flipkart have also received this notice forcing them to stop supplying to Flipkart in Bangalore, as reported on livemint.

FDI regulations in Karnataka state prohibit FDI in direct online retail and so companies like Amazon, Snapdeal and Flipkart cannot purchase goods and sell them to its customers. These companies have hence adopted the marketplace model where the sellers use the firm’s platform to sell their products to buyers.

In Amazon’s case the issue is that Amazon claims its software can predict the buyer’s purchasing nature and hence they have stored the specific goods in their warehouses for easy and fast delivery. This process is called “Fulfilment by Amazon”. Ideally, Amazon collects the payment from the buyer and after keeping a cut of it, transfers the money to the seller. The seller then pays VAT and other taxes to the government. But the ED wants Amazon to pay VAT as it has to take ownership for the products stored in its warehouse much before a customer orders for it, under the “Fulfillment by Amazon” service.

Amazon however have disagreed to the claims made by the tax officials stating that Amazon does not own the goods at any point and neither does it sell on behalf of any seller. It is only providing services—storage, delivery, etc.—for which it charges the seller. So it is not liable to pay the tax.

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Related : Kerala government Bans Ecommerce | After Kerala, Tax Officials in Punjab Get Tough on E-Commerce.

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A spokesperson from Amazon says that the rules in India on eCommerce are not updated and that they do not facilitate transactions between sellers and buyers across the country. She also added that the company is looking at getting the issue resolved at the earliest so that they do not have to shut down their operations in the state.

Amazon had recently announced their 2 billion Dollar investment in India and its plans to open five new fulfilment centers across the country. This announcement was made after Flipkart decided to invest a billion Dollar in India. Flipkart also was under the ED’s radar earlier for violations of FDI norms.