S. 194-O of the Income Tax Act, 1961 (IT Act) provides for levy of Tax Deduction at Source (TDS) on e-commerce transactions whereby an E-Commerce Operator (ECO) is required to deduct tax @ 1% on the value of goods sold or services provided by the seller through the e-commerce platform of the ECO.
Based on the feedback received from the Industry, we have made a submission to Ministry of Finance on July 21, 2021 highlighting the following issues which require clarification for smooth implementation of S. 194-O. We have also requested Ministry of Finance to issue guidelines under S. 194-O of the IT Act clarifying these aspects, similar to Circular no.13 of 2021 which provided guidelines for implementation of S.194Q of IT Act. This will help resolve ambiguities by providing requisite clarity to the Industry and minimising litigation in future.
EXCLUSION OF PAYMENT GATEWAYS/ INTERMEDIARIES FROM THE DEFINTION OF E-COMMERCE OPERATORS:
The definition of ‘e-commerce operator’ under S.194-O is widely worded and could include payment gateways or payment intermediaries (including payment processors) regulated by the Reserve Bank of India (RBI). It is important to note that the services provided by payment entities are limited to facilitating collection of payments made by customers and settlement of such payments to merchants or merchant aggregators. We understand that S.194-O is designed to be applicable only to e-commerce operators that facilitate sales. However, the payment gateways/ intermediaries do not facilitate sale of goods/ provision of services of an e-commerce participant through their digital or electronic facility or platform. Therefore, these payment gateways/ intermediaries should be excluded from the ambit of S. 194-O of the IT Act.
Further, the clarifications provided by Circular no 17/2020 dated September 29, 2020 towards applicability of S. 194-O on payment gateways, casts an additional burden upon such payment gateways/ intermediaries as they are technically not required to withhold taxes.
Suggestion: We have requested MoF to clarify that ECO, for the purpose of S. 194-O, do not include payment gateways, payment service providers, payment intermediaries or payment processing entities, which essentially facilitate payments.
NON-APPLICABILITY OF TDS ON PRE-PAID INSTRUMENTS:
S. 194-O covers sale of goods and services done through the digital or electronic means on an e-commerce platform. Since the term ‘goods’ is not defined under IT Act, pre-paid instruments such as gift vouchers, discount codes, which are essentially money’s equivalent, may inadvertently be interpreted to get covered under the definition of ‘goods’.
Suggestion: We have requested MoF to clarify that pre-paid instruments such as gift vouchers, discount codes, etc. are excluded from the definition of goods for the purpose of S. 194-O.
CLARITY ON TREATMENT OF SALES RETURNS:
Sales returns are very common in both retail and wholesale scenarios. In fashion merchandise, the returns can be as high as 25% of the sales. TDS on gross amount would adversely affect working capital of e-commerce participants.
The Central Board of Direct Taxes (CBDT), vide issue of Circular No 13 of 2021 dated June 30, 2021 providing clarifications under S. 194Q, stated that in case of sales returns, if money is refunded by the seller, then TDS already undertaken may be adjusted against the next purchase from the same seller.
Moreover, Tax Collection at Source (TCS) provisions for e-commerce operators under Goods and Services Tax (GST) specifically provide for reduction of “taxable supplies returned to the suppliers through the e-commerce operator” from the sale value to arrive at the ‘net value of taxable supplies’ on which TCS will be applicable.
Suggestion: We have requested MoF to clarify those sales returns/ cancellations will be excluded while computing ‘gross amount’ for S. 194-O of IT Act and TDS will apply on net amount of sales. This position will align provisions of S.194-O with other TDS provisions and will be at par with GST provisions on sales return applicable to e-commerce transactions.
NON-APPLICABILITY OF TDS ON INCIDENTAL CHARGES:
Incidental charges such as delivery, packing, convenience fee etc. charged to end customers by e-commerce participants represent expenses incurred for availing services from the e-commerce operator. These expenses are charged by sellers to customers and form part of the invoice raised by the sellers. Such incidental charges should not be subjected to TDS.
Suggestion: We have requested MoF to clarify that charges incidental to sale of goods or service do not fall within the ambit of S. 194-O and shall be excluded while computing ‘gross amount’ under S. 194-O of IT Act, provided, the same are shown separately on the invoice.
NON-APPLICABILITY OF TDS ON GST COMPONENT:
There is no clarity on whether TDS would apply on gross amount or would exclude GST. CBDT has, earlier clarified vide issue of Circular No. 23/2017 dated July 19, 2017, that if GST on services component has been indicated separately in the invoice, then tax at source shall be deducted on the amount excluding such GST. Further, Circular No 13 of 2021 issued in relation to S.194Q clarified that if tax is deducted at the time of credit of the amount and GST is separately indicated, then TDS must be undertaken without considering GST component.
Suggestion: We have requested MoF to clarify that TDS will not apply on GST component for the purposes of S.194-O, provided, the same is shown separately on the invoice.
NON-APPLICABILITY OF TDS ON EXPORTS:
Many Indian businesses use e-commerce channels to export products outside of India. In the recent times, e-commerce has been playing an important role in the growth of the export sector in India. However, TDS under S. 194-O adds to the working capital issues of the e-commerce participant who usually operate on very thin margins.
Suggestion: We have requested MoF to clarify that S. 194-O will not apply when ECO facilitates sale of goods or services by a resident seller to a customer outside India i.e., only sale to customers in India are covered under the provisions.
CLARITY ON APPLICABILITY OF S.194-O TO AN E-COMMERCE OPERATOR BEING A NON-RESIDENT
There is no clarity on whether provisions of S.194-O of IT Act shall apply to an ECO, being a non-resident. The CBDT, vide issue of Circular No. 13/2021 dated June 30, 2021, has recently clarified that provisions of S.194Q shall not apply to a non-resident buyer in case of purchase of goods from a seller, being a resident in India, which is not effectively connected with the permanent establishment of such non-resident in India.
Suggestion: We have requested MoF to clarify that a non-resident e-commerce operator will not be covered under S. 194-O of the IT Act. This position will align provisions of S.194-O with clarification provided under S. 194Q.
INCREASE THRESHOLD FOR APPLICABILITY OF S. 194-O
As per S. 194-O, ECO is not required to deduct TDS if the amount paid or credited to e-commerce participants being individuals and Hindu Undivided Family (HUFs) during a financial year does not exceed INR 5 lakh. However, once the amount exceeds the threshold, TDS will be deducted on the entire amount paid/ credited during the financial year.
In the context of online marketplace, it is difficult to forecast at the beginning of the year whether the cumulative sales of a particular small and medium seller will cross the threshold, in order to analyse applicability of S.194-O from the first sale itself. Further, with increasing digitisation, lot of new small and medium sized sellers are coming on board to make sales through the e-commerce platforms. This could amplify the situation and impact these sellers.
Suggestion: We have requested MoF to increase the exemption threshold for TDS deduction under S.194-O to at least INR 40 lakhs for e-commerce participants being individuals and HUFs, in line with the threshold prescribed for GST registration. Further, clarify that withholding tax provisions under S. 194-O shall apply only on the incremental amount exceeding the minimum threshold during the financial year.
We hope you will find the update useful. We will keep you posted on further developments in this regard.
