Why the circular on withholding tax for online retailers needs more clarity

Due to the complex nature of the e-commerce business, these TDS provisions posed significant compliance challenges and practical issues at the ground level. (Photo: istock)
Due to the complex nature of the e-commerce business, these TDS provisions posed significant compliance challenges and practical issues at the ground level. (Photo: istock)

Summary

  • Services provided by an e-commerce operator's group entities, although integral to a transaction, are not covered under the current guidelines

In response to the digital boom and the surge in e-commerce transactions, the Budget 2020 introduced a TDS, or tax deducted at source, on e-commerce operations. This required operators to pay 1% TDS on the gross amount of sales of goods or services facilitated on their platforms. 

However, due to the complex nature of the e-commerce business, these TDS provisions posed significant compliance challenges and practical issues at the ground level. To address such issues, the Central Board of Direct Taxes (CBDT) issued a circular on 28 December 2023. Despite the guidance provided in the circular, there is still some ambiguity, necessitating further clarification. 

Issues addressed

Multi-platform transactions: When transactions involve multiple e-commerce operators, such as Open Network for Digital Commerce or ONDC, the responsibility to deduct TDS falls on the operator directly engaged in payment transactions with the seller.

For instance, a buyer-side e-commerce operator (ECO) facilitates interaction with the buyer, while a seller-side ECO manages interaction with the seller. In such scenarios, the seller-side ECO, responsible for making the actual or deemed payment to the seller, must deduct the applicable taxes. 

Service charge clarification: Whether a seller is required to withhold taxes on the amount of various charges paid to the ECO for their services (such as logistics, shipping or commission charges) has always been a matter of debate. Charges paid to e-commerce operators for ancillary services (like logistics or commissions) linked to the primary sale or service do not necessitate TDS by the seller, simplifying tax obligations.

Handling returns: E-commerce operators can adjust TDS for returned goods in subsequent transactions with the same seller within the fiscal year, providing a practical solution for handling returns. No adjustment is required if the returned goods are replaced by the seller though. The circular has also clarified the treatment of Goods and Services Tax (GST) and discounts. 

Areas that call for attention

Services provided by an e-commerce operator's group entities, although integral to a transaction, are not covered under the current guidelines. For example, at times, packing and transportation services are invoiced and rendered by a group entity of the ECO. Such services are related to the main transaction of sale of goods undertaken on the ECO’s platform. 

The circular also limits adjustments for returned goods to transactions within the same fiscal year, complicating end-of-year returns. It does not mention the guidelines for a situation wherein the goods sold during the end of the financial year are returned, and there are no further sales made by the seller before the end of that FY. 

Typically, the number of transactions facilitated by an ECO is voluminous, and therefore, reporting this in the quarterly TDS return is extremely challenging, resulting in confusion and delays. 

A separate TDS return form designed specifically for the transactions under section 194-O could be provided to the taxpayers. This section of the Income-tax Act, 1961 requires operators to withhold taxes with respect to a seller, even in cases where the consideration is not routed through the ECO or the seller is not aware of the transaction being concluded. This creates a hardship for the ECO to withhold the taxes of the seller.  

Way forward

While the CBDT's circular addresses several pressing concerns of taxpayers, the e-commerce sector awaits further clarification. The government should also contemplate seeking feedback from trade associations and tax professionals to comprehensively address the existing issues. 

Hitesh Sawhney is partner -Price Waterhouse & Co. LLP

 

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