Rationalising TDS on E-Commerce Transactions

Tax on E-commerce operators brought by Budget 2020 and its implications:

Introduction:

The advent of e-commerce platforms has radically changed the way consumers purchase goods or avail services. Nowadays, any goods or services can become available to any consumer at any place on a click of a few buttons. However, as easy it may seem to the consumers to purchase goods or avail services, the back-end tax implications of any such transaction has been made complex – first with the introduction of Tax Collection at Source (TCS) under Goods and Services Tax (GST) Law and now, with the introduction of Tax Deduction at Source (TDS) under the Income-tax Act, 1961 (IT Act).

Let us learn about the new section 194-O requiring deduction of TDS, introduced vide the Finance Act, 2020.

The Basics:

Section 194-O of the IT Act requires the E-commerce operator to deduct TDS while making payment of or crediting the amount to the E-commerce participant

“E-commerce operator” is defined to mean any person who owns, operates or manages digital or electronic facility or platform for electronic commerce and is a person responsible for paying to e-commerce participant.

For Example: Amazon, Snapdeal, Flipkart, etc.

“E-commerce participant” is defined to mean a person resident in India selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce.

Here, it is important to note that the scope of section 194-O is only limited to a resident e-commerce participant.

For Example:

• If B, a resident in India, was to sell his goods or services on a website run by XYZ Ltd, B would be the e-commerce participant and XYZ Ltd would be the e-commerce operator.

Provisions of TDS under section 194-O of the IT Act:

• Section 194-O requires the E-commerce operator to deduct TDS in respect of sale of goods or provision of service facilitated by it through its digital or electronic facility or platform @ 1 % on gross amount of sales made by e-commerce participant, at the time of making payment or crediting the amount, whichever is earlier.

For Example:

Mr A (e-commerce participant) is selling its products through Amazon (e-commerce operator). Mr X buys this product online from Mr A for Rs 50,000 on 1 January 2020. Amazon credits the account of Mr A on 1 January, 2020, but makes payment to Mr A on 1 February, 2020.

Here, Amazon is required to deduct TDS @1% on Rs 50,000 (Rs. 500) at the time of credit to Mr. A or making payment, whichever is earlier. In this case, TDS of Rs. 500 should be deducted on 1 January 2020.

• In case, any payment is made by a purchaser of goods or recipient of services directly to an e-commerce participant, it shall be deemed to be amount credited or paid by the e-commerce operator to the e-commerce participant and shall be included in the gross amount of such sales or services for the purpose of deduction of income-tax.

In the above example,

If Mr X makes the payment directly to Mr A, even in that case, it shall be deemed that amount is paid by Amazon to Mr A and accordingly, Amazon shall be required to deduct TDS @ 1% on such deemed payment.

• The section further provides for a threshold of Rs. 5 lakhs i.e. if the gross amount of sales or services or both made during the year by an e-commerce participant, being individual or HUF, does not exceed Rs. 5 Lakhs, the e-commerce operator is not required to deduct TDS at all. The only condition being that such participant provides his PAN or Aadhaar to the e-commerce operator. If the e-commerce participant does not provide his PAN or Aadhar to the e-commerce operator, TDS is required to be @ 5% without the benefit of threshold, consequent to section 206AA of the IT Act.
• Transaction would not be subject to TDS under any other provision of Chapter XVII-B of the Act if:
• TDS has already been deducted by e-commerce operator or
• No TDS needs to be deducted by virtue of above threshold (as discussed in previous bullet).
• The E-commerce participant can apply for deduction of TDS at no or lower rates under section 197 of the IT Act, by making an online application to the jurisdictional Assessing Officer for the same.
• It is important to note that section 194-O of the IT Act shall not apply to any amount received by an ecommerce operator for hosting advertisements or providing other services which are not in connection with the sale of goods or services.

Other points which require clarity:

• Will GST be included in the amount of Gross Sales?

The Central Board of Direct Taxes (CBDT) has made it clear vide Circular No 23/2017 that whenever, GST has been separately mentioned in the invoice, TDS shall not be required on the GST component.

• What if an Indian e-commerce participant sells goods through an overseas e-commerce operator?

While the section only includes Indian e-commerce participants only, it includes Indian as well as overseas e-commerce operators.

For Example

Mr A, an Indian e-commerce participant sells his goods through Alibaba Inc, an overseas e-commerce operator. In such a case, Alibaba Inc shall be required to deduct TDS @ 1% while crediting or making payment to Mr A. This will require the overseas e-commerce operators to obtain the necessary registrations and set up the required facilities to ensure TDS is deducted and paid to the Indian Government, failing which, they shall be considered as assessee in default. In this regard, necessary relaxations from the CBDT is the need of the hour.

While introduction of section 194-O shall undoubtedly increase the tax base and contribute to the revenue of the Indian Government, necessary clarifications in respect of certain issues must be given to ensure smooth implementation and avoid litigations in the future.

The newly inserted section 194-O shall be effective from 1st October, 2020.

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Please feel free to contact us at hitarth.sheth@bhaskara.in/info@bhaskara.in

Research & Publishing Team:

CA Raj Sheth (Partner at BCG)

Kareena Jaisinghani (Intern at BCG)