Proposed 1% TDS on e-commerce transactions to impact firms, sellers

Topics Budget 2020 | TDS | E-commerce firms

The new levy of 1 per cent tax deducted at source (TDS) on e-commerce transactions proposed in the Budget is likely to hit the cash flows as well as the working capital of mega players like Amazon and Flipkart as well as their sellers. E-commerce firms are studying the proposal and would seek clarifications soon.

“We hope the tax regime is simple and uniform, so that millions of small and medium businesses can go online, digitise their operations and continue to contribute to growing the economy,” said an Amazon spokesperson.

Moreover, Flipkart is looking at the details, particularly how the proposals impact micro, small and medium enterprises (MSMEs) and sellers on its platform. “We will discuss this with our seller partners and engage with government and other stakeholders in due course,” said a spokesperson.

The proposal would also impact Uber, Myntra, Zomato and Swiggy, among others, and their sellers on such platforms, as well.

In addition to making a customer’s purchases on these platforms more costly, it will also mean sellers will have to face the brunt of reduced cash flows, amid already low margins for some. Experts said e-commerce companies already deduct 1 per cent TDS under the goods and services tax (GST) Act. The new proposal is to take effect from April 1 as a new Section in the Income Tax Act.

Salman Waris, managing partner at Delhi-based specialist technology law firm TechLegis Advocates & Solicitors, said the proposed levy will further affect the working capital of e-commerce companies and reduce cash flow for e-sellers. He added, “Unless there is a relaxation of existing processes involved, this provision will be an additional compliance burden and further increase the cost of compliance for e-commerce companies.”

The Budget documents define an e-commerce operator as “an entity owning, operating or managing the digital platform.” It also defines an e-commerce participant as a “person and resident of India selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce.”

An executive from one of the large e-commerce companies said, “Cash will be stuck with the government in the refund system. And, most of these are MSMEs. “Tax was already being deducted under GST laws and the government had all the data to check any suspected evasion. Now, the levy of TDS under income tax will add to the compliance burden of e-commerce companies and reduce cash flow. This will be even more for SMEs (small and medium enterprises) and with no incremental transaction data for the government.”

Impact on sellers

Though the 1 per cent TDS will not apply to sellers on the platforms who have total annual sales below Rs 5 lakh, it will still hit a substantial number of traders. Kumar Rajagopalan, chief executive officer (CEO) of the Retailers Association of India, said the move can create traceability of seller transactions on marketplaces. This can weed out fly-by-night sellers. 

“Most retailers have net profit margins of about three per cent and this means 33 per cent of their net income has been blocked as TDS,” he added.

Daksha Baxi, head, international taxation, at law firm Cyril Amarchand Mangaldas, said the provision is aimed at ensuring all information relating to earning income by anyone is captured and whatever the minimum tax is collected.

Ankur Pahwa, partner at consultancy EY India said the provision would result in cash blockage for sellers, especially those who operate with minimal margins.

According to Anil Talreja, partner at Deloitte India, the provision may necessitate e-commerce operators to re-visit their model, contracts and systems to ensure compliance, given the enormous volumes transacted by the medium.

WTO issue

The latest move could also ruffle some feathers at the World Trade Organization WTO). Since 1998, the WTO has regularly placed a moratorium on imposing customs duties on electronic transmissions. But India has argued at the top body that perpetual moratorium forces countries to give up their right to tax burgeoning transactions and lose revenues.

Currently, multinational payment service providers such as Visa and Mastercard control the underlying architecture of most payment gateways. Since India is expected to see a sharp rise in digital payments over the next few years, the government considers not taxing such transactions a lost opportunity.

Now, rather than imposing customs duties, the government has gone in for a change in the income tax law. Earlier, Delhi had hinted that it was willing to tax electronic transactions through Section 9(1)(i) of the I-T Act.

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