While the proposed section is not intended to augment tax revenue, in the present times, this move may end up discouraging many sellers from adopting the e-commerce platforms.
- S Vasudevan and Harsh Shukla
E-commerce has been growing rapidly over the years due to greater penetration of internet into the country. Every day, the quantum of transactions carried out through e-commerce has been increasing. The Finance Bill 2020 has proposed to introduce Section 194-O to capture the transactions into the tax-net requiring withholding of tax on e-commerce transactions.
Basics of E-commerce
E-commerce is generally understood as sale or purchase of goods or services over the internet. In India, there as three popular models of e-commerce business: (i) Inventory based model, (ii) Marketplace based model, and (iii) Hybrid of inventory based and market place models.
In inventory-based model, inventory of goods or services is owned by e-commerce entity and is sold to the customers directly through electronic platforms. Whereas, in marketplace-based model, a platform is provided to the customers by an e-commerce operator over digital or electronic network where the operator merely acts as an intermediary/ facilitator between buyers and sellers. The last model, i.e., hybrid of inventory based and marked place model, is combination of the first two models.
Under the marketplace-based model, an operator maintains a medium/platform, which can be accessed over the digital or electronic network. He allows the sellers to list their goods or services on the platform and allows the buyers to order such goods/ services through the same platform. Thereafter, the goods/ services are delivered by the seller to the buyer, often facilitated by the operator. The customer usually makes payments for such procurements to the operator, who in turn passes it on to the seller. The operator charges commission/ remuneration to sellers for facilitating the sale of goods or services and for providing certain other value add services.
Coverage of new Section 194-O
The provision seeks to target marketplace-based model of e-commerce, wherein three parties are contemplated in a transaction, viz. operator, participant (seller), and the customer (buyer). As per the definition, ‘e-commerce operator’ should also be responsible for making payment to the participant for the goods sold or services provided, apart from operating the platform. Thus, e-commerce transactions carried out through inventory-based model are clearly out of the scope of this section.
Interestingly, the definition of ‘e-commerce participant’ proposes to cover only sellers and service providers, who are Indian residents. As such, transactions undertaken by non-resident participants will not be subjected to TDS under this section.
Also, small participants, who are individuals/ HUF and whose value of sales or services during the year does not exceed Rs 5 lakhs, will not be covered by the scope of this section. This relaxation is, however, subject to the condition that the individual/HUF furnishes its PAN or Aadhar Number to the operator.
How much tax is to be deducted and on what value?
The section obligates the operator to withhold tax at the rate of 1% of the gross amount for the supply of goods or services provided by the participant. Such deduction is to be done at the time of credit or payment to participant, whichever is earlier, similar to requirement under other TDS provisions.
It is interesting to note that the obligation to deduct and pay tax is not on the customer, who ultimately pays for the goods or services, but on the intermediary-operator, who is responsible for collecting such payment and passing it on to the participant. It is expressly provided that once TDS has been deducted and deposited by the operator under this section, there will be no obligation to deduct TDS under any other section on such transaction. Thus, there will be no further onus on the customer to deduct TDS while making payments towards goods/ services.
Also, the TDS amount is to be calculated on the gross amount charged to the customer for such goods or services. The gross amount will include any amounts, which may be retained by the operator towards its commission, remuneration, or other service charges.
Significantly, it is not very clear as to whether the participant, under other sections, such as 194H or 194C or 194J, will continue to be liable to deduct tax on such commission or remuneration or service charge payable by him to the operator. Thus, there could be crisscrossing of deductions between the operator and the participant.
What happens if the customer makes payment directly to the participant?
There are business models in place, where the customer is given the option of either making the payment through the operator or directly to the participant. For instance, various taxi aggregators give option to the riders to either make payment in cash directly to the drivers or through electronic mode (like credit card or e-wallet) to the operator. The question which arises is whether the operator will be liable to deduct tax even on those payments which are directly made by the customer to the participant. In this regard, an explanation given in the new section states that even payments made by the customers directly to the participants shall be deemed as payment made by/through the e-commerce operator.
Thus, for the purpose of calculating the TDS amount at 1%, the operator will have to include even such direct payments, though these payments were never routed through the operator. This appears to be quite an onerous obligation cast on the operator.
This also leads to another interesting situation. There are e-commerce models wherein the operator never collects payment from the customer and is, hence, never responsible for making any payment to the participant. In these models, the participants always receive payments directly from the customers. The operator merely facilities the supply of goods or services through the platform. Strictly speaking, such an operator will never satisfy the definition of ‘e-commerce operator’ given in the section, as he is never responsible for making payment to the participant. However, a doubt arises because of the explanation which deems even direct payments as being payments routed through the operator. This
can potentially lead to disputes and a suitable clarification can go a long way in avoiding them.
Scope of ‘e-commerce’ and ‘goods’ is very wide
‘Electronic commerce’ is defined in the widest possible way to cover any supply of goods or services or both over digital or electronic network. Further, the definition states that goods or services would cover all digital products as well. Significantly, there is no definition of “goods” and there are no exclusions like in other sections like 194H. Thus, potentially the section can cover transactions in shares and securities, other financial instruments, electricity, etc. Moreover, the definition of ‘e-commerce operator’ can also possibly cover intermediaries, that are in the nature of exchanges or auctioneers, though not typically
considered as ‘e-commerce’ operators in the business world.
Therefore, it is very important for the businesses to carefully analyze the applicability of these provisions on their transactions in the light of the definitions given therein, rather than simply going by the common parlance understanding. Also, the section may potentially end up applying to some transactions/ businesses, which were probably never the intended targets. Hence, suitable representation may have to be made for appropriate amendments/clarifications.
There is absolutely no doubt that the proposed section is not intended to augment tax revenue but is primarily meant to bring more businesses under the tax radar. However, in the present times, considering the extreme working capital crunch faced by many businesses, this move may end up discouraging many sellers from adopting the e-commerce platforms. Only time will tell the extent to which this tax withholding provision ends up holding back the growth of e-commerce in India.
- S Vasudevan is Partner and Harsh Shukla is Principal Associate, Lakshmikumaran & Sridharan Attorneys. Views expressed are the authors’ own.