Against eCommercial Interests

CONTEXT: The introduction of Section 194-O in the Income Tax Act during the Budget 2020 can have a disastrous effect on the economy, companies and livelihoods. 

Significance of Section 194-O

• Primary intent: to widen the tax base by bringing the e-commerce ecosystem into it. 

• Participants in this ecosystem, it was believed, neither paid taxes nor filed their tax returns, thereby escaping tax liability. 

• Provisions include:

• Exemption to Non-Resident e-Commerce participants

• Sets a Ceiling limit: of Rs.5 lakhs for resident individuals/Hindu Undivided Families (HUF’s)

• Prescribed a Tax Deducted at Source (TDS):

• 1% for Permanent Account  Number (PAN) holder/Aadhar

• 5% for the remaining ones.

• TDS applicable on sale of goods and services by e-commerce entities was deferred till 1st October 2020 by the government.

Limitations of Section 194-O: The one-size-fits-all approach defeats the purpose of Ease of Doing Business in India due to the following issues.

• Existing sectoral complexities

• Risk of forcing an e-commerce entity to collect TDS amounts in areas in which it’s not required or even specifically prohibited.
• The complexity of the provision would extend to other scenarios as well, such as cancellations and discounts, which have not been thought through or tested while introducing such a section. 

• In conflict with the existing sectoral regulations: 

• For, E.g. The Insurance Act, 1938, does not allow an insurance intermediary to deduct any amount from the premium collected from the customer.
• The insurance intermediary has no control over the payments received in the account, as this belongs to the nodal bank and not the intermediary. 
• Similarly, e-commerce travel businesses, involved in air ticketing, are mandated to follow international payment settlement procedures laid down by the International Air Transport Association (IATA), which do not allow TDS.

• Underlying costs of compliance

• Reimbursement of TDS to the e-commerce entity is dependent on the end supplier.
• The TDS burden would force the taxpayer, to file their tax returns and claim refunds, which may incur additional cost and burden for them and the tax department respectively.
• TDS burden would force the mediator e-commerce entity to pay TDS from its own funds leading to working capital block, increased costs and refund woes; 
• An existential threat for micro, small and medium enterprises.

• Risk of emerging livelihoods in various sectors

• Impact on livelihoods created through online modes, such as plumbers, electricians, delivery staff, and drivers are at risk as the tax will now get deducted on their total bill and not actual earnings.
• This pushes them to qualify for a tax deduction, to file their tax returns and claim refunds, which may incur additional cost and burden for them and the tax department respectively.

Conclusion: Government needs to put in abeyance the applicability of Section 194-O and work towards issuing necessary clarifications on its applicability, and non-applicability, sector by sector.