Budget 2020: New TDS Levy On E-Commerce Participants—Too Much, Too Soon

One of the more talked-about taxation issues in recent times has been taxation of the digitised economy. While the OECD, through its base erosion and profit shifting or BEPS project, is working with more than 130 countries to arrive at a consensus-based approach for determining the tax rules in the digitised world, countries have been introducing unilateral measures. India was one of the earliest movers and started changing the tax laws aimed at the taxation of digitised companies with the introduction of an Equalisation Levy a few years back.

The Union Budget 2020 has taken another step in that direction with a proposal requiring e-commerce operators to deduct taxes at source (TDS) from payments made to e-commerce participants. While the equalisation levy was aimed at companies earning income in India by way of certain digital services, the proposed TDS provisions are aimed at ‘widening and deepening’ the tax net by bringing participants of e-commerce within the net.

Budget 2020 Proposal At A Glance

The TDS proposal is sought to be achieved by the introduction of a new section (194-O in the Income-tax Act, 1961).

The new levy of TDS is at the rate of one percent and is applicable on the gross amount of sale to be remitted by the e-commerce operator to the e-commerce participant, for the sale of goods or provision of service facilitated by it through its digital or electronic facility or platform.

Any payment made by a purchaser of goods or recipient of services directly to an e-commerce participant shall be deemed to be an 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.

There is a de minimis threshold of Rs 5 lakh for e-commerce participants who are non-corporates holding a PAN or Aadhaar.

The proposed amendment is stated to take effect from April 1, 2020.

To illustrate the provisions:

• If B, an Indian baker, was to sell his/her cakes on a website run by XYZ Company, B would be the e-commerce participant and XYZ would be the e-commerce operator.
• If A, an Indian resident, bought cakes on XYZ.com for Rs 1,000 and paid for the same and XYZ were to remit a sum of Rs 800 to B (after deducting taxes, commission, service fee, etc), the proposed provisions require XYZ to deduct Rs 8 and pay only a sum of Rs 792 to B, the Indian baker.

This is undoubtedly a very bold initiative undertaken in this evolving arena of e-commerce taxation. The Indian e-commerce sector is the fastest growing in the world and is expected to grow to $200 billion by 2026. This sector is expected to play a pivotal role in achieving the ambitious target of a $5-trillion economy by 2024-25, as envisioned by the Government of India. Therefore, it is imperative that any pioneering change in the tax landscape of this sector is well-thought-out and implemented smoothly. The need for these provisions to be stable is very important too.

Timelines For Introduction And Implementation

One would immediately note that the levy is not directed at e-commerce operators (the e-commerce websites, marketplaces, platforms, etc) but at the participants (i.e., sellers, manufacturers, service providers, etc) who use an e-commerce platform to sell goods and services. The objective of the levy has been mentioned in the Memorandum to the Finance Bill, 2020 as to ‘deepen and widen’ the tax net.

The implementation of the new TDS provision would necessitate significant augmentation of resources and infrastructure of e-commerce operators as well as e-commerce participants.

• E-commerce participants, especially the small-scale sellers would need to upgrade or implement systems to capture the taxes withheld and also work towards addressing the impact this would have on their working capital.
• The government too would need time to upgrade and update the TDS platforms to enable the collection of data and putting in place a mechanism for analysis of the same.

The provisions are slated to be made applicable in about seven weeks from today.

TCS And TDS: Ease Of Business?

It needs to be noted that e-commerce operators are liable to collect taxes at source (TCS) under the GST law in respect of consideration received by them on behalf of the supplier of goods or services who makes supplies through the operator’s online platform. The rate of TCS is one percent. The GST law also requires mandatory registration of the e-commerce operator and the e-commerce participants. This being the case, a TDS provision on the same transaction under income-tax law would amount to additional burden both from a working capital and an administration perspective. The Central Board of Direct Taxes has an information-sharing pact with the Central Board of Indirect Taxes and Customs. CBDT can leverage the information available with the CBIC and save on duplication of efforts for the industry.

Issues Which Could Be Litigious From The Outset

As regards the scope of the levy, Section 194-O does not define the quantum on which taxes are required to be deducted. It only refers to the ‘gross amount of sale or services or both’. This could prove to be an avenue for litigation with different interpretations being adopted by the taxpayer and the administrator. The inclusions and exclusions from the amount would be the vulnerable part.

For instance, the treatment of sales returns (return of goods/services) could prove to be contentious. Sales return on account of non-conformity with the quality standards or non-fulfilled promises is a significant component of e-commerce. Therefore, apparel sold on an online marketplace for Rs 1,000 would require the e-commerce operator to deposit Rs 10 as TDS immediately on behalf of the e-commerce participant (i.e., the seller). There is no provision to consider the subsequent return of the apparel by the customer in computing the amount to be subject to withholding.

It may be noted that the TCS on e-commerce under GST specifically provides for a reduction of “taxable supplies returned to the suppliers through the e-commerce operator”.

The government could consider redrafting the proposed section to specifically state that no withholding of taxes is required on sales returns (i.e. the gross sales on which TDS is to be computed is to be arrived at after reducing ‘sales returns’).

Similarly, the proposed provisions do not provide clarity regarding the liability of the person responsible for TDS in cases where multiple e-commerce operators are involved in the transaction, or for that matter the liability in case of use of third-party electronic payment gateways in settlement of the e-commerce transaction. This could result in multiple incidence of TDS, which could result in working capital blockage and make it uncompetitive for online sellers. This could be avoided by providing a specific provision in the proposed section to cast responsibility for TDS on the e-commerce operator who is making payments to the vendor.

Another aspect that could lead to litigation in the future is the applicability of the provisions on foreign operators. While the section applies to only ‘resident’ e-commerce participants, it applies to all e-commerce operators.

Hence, in case an Indian painter is selling his paintings on a platform run by a U.S. or U.K. company to sellers in the U.K., the U.S. or U.K. operator is required to withhold Indian taxes and Indian compliances would apply!

The government would do well to clarify the applicability, failing which this is bound to result in litigation in the future.

Looking Forward

Finally, there is an overarching question whether the objective of the introduction of the new TDS levy as to primarily widen and deepen the tax net by bringing participants of e-commerce within tax net could be achieved without upsetting the apple cart for the fastest growing sector of the Indian economy.

The stated objective may also be achieved by the introduction of a reporting mechanism akin to the provisions of Section 285BA of the Income-tax Act, 1961, which require reporting persons to furnish a ‘Statement of Financial Transactions’ or reportable accounts in respect of specific financial transactions registered or recorded by them. This mechanism will ensure that the tax authorities have the relevant information to achieve the policy goal without negatively impacting the working capital of the sellers and reduces the compliance costs for sellers.

Even if the TDS provisions are to be introduced, it may make sense to introduce them after giving the industry sufficient time for preparedness and certainly more than the current time of seven weeks. It is equally important for the tax administration to consider all aspects which require more clarity. There are innumerable circulars in respect of other TDS provisions that have been issued after litigation has surfaced. The CBDT could consider issuing similar circulars or instructions upfront in case of this new levy. This would require a round of engagement with the e-commerce operators and participants in respect of the proposed provisions.

Ajay Rotti is Partner at Dhruva Advisors LLP.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.