In Union Budget 2020 speech, Hon’ble Finance Minister Nirmala Sitharaman has proposed a new Tax deducted at source (“TDS”) provisions for e-commerce transactions. The newly proposed TDS provisions have been introduced with the goal of ‘widening and deepening’ the tax base across the country.
With the introduction of this provision the e-commerce companies like Flipkart, Amazon will have to deduct an extra 1% of tax as TDS while paying the seller registered under them. While under the Goods and Services Act, the e-commerce companies were already deducting 1% TDS from the seller registered with them.
1. What is TDS?
TDS is the abbreviation used for Tax Deducted at Source. It indicates deduction of tax (whether Income tax or GST) at the time of execution of transaction only.
Indian tax authorities have introduced TDS with an objective of increasing transparency. Tax deducted at source is used through which a part of the tax on the transaction is deducted and paid to the government at the time of execution of transaction only by the prescribed party of the transaction.
2. TDS at 1% on E-commerce operators
Through the Union Budget, 2020, Hon’ble Finance ministry has taken another step in the same direction with the proposal of requiring e-commerce companies to deduct taxes at source from the payments made to the e-commerce sellers.
Union Finance Minister Nirmala Sitaraman said in her budget speech,
“In order to widen and deepen the tax net, it is proposed to provide that e-commerce operators shall deduct TDS on all payments or credits to e-commerce participants at the rate of 1% in PAN/Aadhaar cases and 5% in non-PAN/Aadhaar cases.”
The proposal of TDS is strived to be achieved by introducing a new section 194-O in the Income-tax Act, 1961.
2.1 Some essential takeaways
- The payment and deduction of TDS- 1% on the gross amount of sale
- Applies on all the payments to resident e-commerce participant
- Time of deduction: Earlier of credit to the name of e-commerce operator or payment
- The provision applies even if the purchaser makes the payment directly to the e-commerce participant
- Deduction of TDS under any other provisions will not happen
- There will not be any deduction if the e-commerce participant is an individual or HUF with an income of less than 5 lacs and has successfully furnished PAN or Aadhar
- Furthermore, an e-commerce participant is any Indian resident who sells goods or offers services through the electronic or digital facility or platform.
- The proposal is going to take effect from 1st October 2020.
To understand the provision clearly let’s have a look at an example,
- Let’s assume ‘A’, an Indian resident. ‘A’ runs a bakery business and he sells his bakery products on an e-commerce website XYZ.com. The company XYZ runs the website. Here, in this case, A is the e-commerce participant, and ABCD is the e-commerce operator.
- Now, let’s further assume ‘B’ is an Indian resident who buys cakes on XYZ.com and pays Rs. 1000 for the same. After deducting commission, service fee, and taxes, XYZ is about to remit Rs. 800 to A. With the introduction of this provision, XYZ needs to deduct Rs. 8 more as 1% TDS and pay a sum of Rs. 792 to A, the bakery owner.
3. Modus Operandi of transactions of E-Commerce Operators
E-commerce is a platform where buying and selling of goods or services or both proceeds through an electronic medium. The clause 44 of section 2 of the Central GST Act, 2017 defines E-commerce as follows:
“Electronic commerce operator as defined under clause 45 of section 2 of Central GST Act, 2017 means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce”.
Hence, companies selling their own products through their websites will not be considered as e-commerce operators. Therefore followings are the basic functions of E-commerce operators:
- Display the availability of the product and services on their website
- Making arrangement for dispatches of products and services through any of their registered vendors
- Once the vendor supply the product or service to customers, the e-commerce operator is responsible for settling the payment within a specific period
As per the memorandum, an e-commerce operator is anyone who owns, operates or manages electronic or digital facilities over electronic or digital networks for the supply of goods or services.
Furthermore, an e-commerce participant is any Indian resident who sells goods or offers services through the electronic or digital facility or platform.
4. Significance of introduction of new provisions
With the market for e-commerce companies growing rapidly, the measures Indian government has taken is definitely a bold one.
The e-commerce sector in India is one of the fastest in the world. As per recent stats it can grow upto $200 billion by the year 2026.
Hence, it’s pretty evident that any change in the taxation procedure of this sector must have to be well-thought-out. Not only that the changes also need to be implemented smoothly.
Talking about the scope of the levy, section 194-O does not define the quantum on which the taxes need to be deducted. It only talks about the ‘gross amount of service or sale or both.’
This can open a window for taxpayers and the administrator for litigation by adopting various interpretations.
- The treatment of sales returns can lead to various arguments in this case. Return of product on the ground of sub-standard quality or not meeting expectation is a common scenario in case of the e-commerce business. Hence, if the seller has sold the product at Rs. 1000, the e-commerce operator will have to deposit Rs. 10 as TDS on behalf of the participant.
- The tax authorities has not mentioned any provision in the proposal to consider the subsequent return of the product in computing the TDS amount subject to withholding.
In this case, Indian tax authorities can consider redrafting the proposed section. Furthermore, they can state that no withholding of taxes is necessary on sales returns.
Another thing that can potentially lead to litigation is the applicability of the provisions in case of foreign operators.
The first question that arises is that will it be possible to achieve the primary objective of widening and deepening the tax net by driving e-commerce participants within the tax regime without upsetting the fastest growing sector of the Indian economy.
Offering sufficient industry time to prepare for the tax compliance requirement will definitely make sense.