Budget 2020 | FM Nirmala Sitharaman announces additional tax on e-commerce players and traders

FM adds an additional levy on e-commerce players and traders, which could increase compliance cost

The Narendra Modi government’s intent on casting the direct tax net (income tax) wide was evident once more in the Budget with a section (194-O) being inserted in the Finance Act, 2021. It enables levy of tax deduction at source (TDS) at the rate of 1% on e-commerce transactions, a move that is expected to increase the compliance cost on e-commerce majors such as Amazon and Flipkart, even as it seeks to get the small reseller into the income tax ambit.

The new provision will apply only when the seller’s gross amount of sales during the previous year through the e-commerce operator is more than Rs.500,000 and the entity or person has furnished his PAN or Aadhaar number. Effective from April 1, 2020, the provision instructs e-commerce operator — an entity owning, operating or managing a digital platform — to deduct 1% TDS on the gross amount of sales or service or both. In case the entity or person has no PAN or Aadhaar, then the e-commerce player will deduct 5% TDS. This TDS will encourage (or force) a few sellers who would not have otherwise filed returns to do so, to claim the TDS credit.

Even food-tech companies could come under the ambit, as the ‘Press Note 2’ issued by the Department of Industrial Policy & Promotion in December 2018 defines e-commerce not just as buying and selling of goods over a digital network, but also includes services. Executives at e-commerce majors and food tech, including Swiggy, are still looking at the finer details and refrained from making any comments to Outlook Business.

Currently, under the indirect tax regime (GST), e-commerce firms collect 2% as tax collection at source (TCS) when they make payments to suppliers for goods sold on their platforms worth over Rs.250,000, and deposit it with the government. The TCS includes 1% state GST and 1% central GST/IGST. The seller adjusts the TCS payment against his final GST liability. Earlier, e-commerce companies had urged the government to defer the TCS move, pointing out that it would increase their compliance burden besides creating cash-flow issues for small and medium sellers. The GST Council had put on hold its implementation for a year from July 1, 2017 till June 30, 2018, and it was again put off till September 2018. But since then, the levy has become effective.

Now, with the new introduction of TDS, the burden of compliance for both direct (TDS) and indirect taxes (TCS) has been put on e-commerce platform players. The effective levy (TDS +TCS) would now amount to 3% for a seller or provider of service on a digital platform. Currently, Amazon and Flipkart claim to have 500,000 and 100,000 MSME sellers, respectively, on their platform. As per Amazon, since May 2015, more than 50,000 Indian exporters clocked $1billion exports under the Amazon Global Selling programme. More than 80% of these exporters come from non-metro and tier 2 and below cities, where the government is looking to widen the tax net.

According to data released by the Income Tax Department in October 2019, about 62.1 million returns were filed up to December 2018, which included returns for past assessment years.