Income Tax 13 Feb,2020
Rationalizing TDS on e-commerce transaction
Priyanka SahiChartered Accountant
Binod GuptaChartered Accountant

E-commerce is the new way of doing business and in India the market around it is continuously developing. With a projection of the e-commerce market in India becoming US$ 84 billion by 2021 from US$ 24 billion in 2017 - this market has a lot to offer! A key employment generator - it is expected that this space would generate direct employment for around 1.45 million workforces by 2021.

With these projections, it is no surprise that the Government in Union Budget 2020 has proposed a tax deduction at source on payments made by e-commerce operators to e-commerce participants for sale of goods or services using their digital or electronic facility or platform. Such a tax deduction has two stated objectives - firstly, to widen the tax base and secondly to ensure reporting of transactions that would otherwise have gone unreported.

However, it needs to be noted that the proposed withholding tax is in addition to the tax already being collected at source (TCS) under the Goods and Services Tax (GST) law at one per cent on the net taxable value of goods or services supplied through e-commerce operators. As a result, e-commerce operators and suppliers transacting on e-commerce platform are anyway mandatorily required to get registered under GST (irrespective of the turnover) in order to pass on/ claim TCS credit.

Such levy of GST and mandatory registration already achieves the stated objective of reporting transactions that otherwise would have gone unreported and levying an additional one percent of tax deduction at source on gross proceeds would only result in creating a severe cash flow crunch for e-commerce participants, especially MSMEs who anyway work on low margins.

In this regard, it may be noted that an exemption has been carved out in the budget for individuals and HUF if the gross amount of annual sales/ services is less than INR 5 lakh and the individual/ HUF has furnished their Permanent Account Number. However, this threshold is very low and does not provide any respite to majority of the MSME sector given it is only applicable to individuals and HUFs. Hence, the Government should consider not only increasing the threshold to a reasonable amount but also making it applicable to all types of taxpayers.

Further, the term 'e-commerce participant' has been widely defined as is expected to cover not only the likes of Amazon and Flipkart but also UrbanClap, Uber, Swiggy. In case of UrbanClap and Uber, this tax deduction at source is likely to impact small time workers like carpenters, plumbers, drivers, etc. and while they may be eligible for the exemption of INR 500,000 per year, to require them to undertake the related tax compliances would be unfair and also increase their cost of doing business.

In this regard, it may also be noted that an option of obtaining a lower withholding tax certificate has also been provided in Budget 2020. However, with respect to such participants, this option is effectively theoretical and the right thing to do would be to bring the exemption threshold to a reasonable limit.

A welcome move is that the proposed levy mentions that transactions in respect of which taxes have been deducted at source under this provision would not be subject to any other deduction of tax at source. However, the ask of the Industry, which was to do away with the tax presently having to be deducted by the participants on commission paid to operator has not been fully addressed. This is so because the clause has been drafted to exempt the transactions of 'sale of good' or 'provision of service' from any other withholding tax provision of the Act and not specifically commission payouts. A clarification issued in this respect would provide a lot of relief to the industry and rule out unnecessary litigation.

Also, a reading of the provision suggests that tax is to be deducted on the gross amount paid. Accordingly, a reasonable reference should be that in case where trade discounts are extended and/ or a free item given or one-year free warranty extended, the tax is required to be deducted on the amount of sale that the e-commerce participant makes and hence discounts are to be netted off and free samples/ services taken to be at nil value. Some clarity on this aspect would also help. Separately, a common practice in such cases is that the e-commerce operators fund the discounts, etc., in such a case how would the amount of sale/ service be calculated?

While a move in the right direction, this provision of withholding tax on e-commerce operators should be made more reasonable with increased thresholds, clear exemptions and simpler processes.

The tax base in India needs to increase, however, moves like this should also be coupled with meeting the overall objective of incentivizing MSMEs and reducing their compliance burden, as done by the move of increasing the threshold limit for tax audit.

CA Priyanka Sahi and CA Binod Gupta.

Views expressed are personal.