The public accounts committee (PAC) concluded that online sellers using the platforms are undercutting prices by as much as 20 per cent by not charging VAT which is damaging to homegrown businesses.
As much as £1.5bn was lost last year to online VAT fraud according to HMRC, though it could be higher and the PAC is calling on the tax authority to produce better estimates by March next year.
“Online VAT fraud is hugely damaging yet, as online sales continue to grow, the response of HMRC and the marketplaces where fraudsters operate has been dismal," said chair of the PAC Meg Hillier.
“HMRC needs to be far tougher in protecting the interests of British businesses and taxpayers. As a priority it must inject more urgency into enforcement action. But it should also push the case for further new powers."
It has also called for HMRC to be tougher tackling the issue, using existing powers more urgently, as well as exploring new measures that ensure that liability falls on the platforms.
The group of MPs said it was "bewildering" that companies such as Amazon and eBay had "taken such little action to date" despite promising the committee they both planned to increase the technology it was using to tackle it over the next six months.
The PAC has also demanded that there must be an agreement by the same deadline for sharing information between HMRC and the marketplaces among other measures, and that the platforms should voluntarily show VAT numbers for non-EU sellers whose goods come to the UK .
"Online marketplaces tell us they are committed to removing ‘bad actors’ yet that sentiment rings hollow when those same marketplaces continue to profit from the actions of rogue traders. They can and should do more to drive them out and we will expect online marketplaces to cooperate fully with HMRC in tackling non-compliance," said Hillier.
"Our committee’s own mystery shopping exercise demonstrated just how simple it is to buy goods online without paying VAT. We got no sense that the traders responsible felt under any obligation to pay their dues. Clearly this is not good enough. The message must go out loud, clear and backed by the full weight of law: the UK is not a soft touch for VAT fraudsters."
The action was heralded by the Federation of Small Business as "a welcome starting point". Its chairman Mike Cherry said: "The UK’s small retailers have enough to worry about with spiralling input costs and flagging consumer demand."