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Photo: Bloomberg
Photo: Bloomberg

A new tax web that has entangled e-commerce

Section 194-O of India’s Income Tax Act aims to cast a wider tax net, but is riddled with such complexity that it could leave many e-com platforms perplexed. Many aspects of it need rework

Suspense often seems like the second name of India’s tax department. For a tax rule that was announced back in February as part of this fiscal year’s budget and then deferred by six months, the Central Board of Direct Taxes (CBDT) waited until Tuesday evening to issue clarifications. Kept on edge were e-commerce operators, many of which are said to be in a scramble to adapt. The levy they had braced for takes effect on 1 October, alongside other moves such as compulsory goods and services tax (GST) e-invoicing by large firms and a 5% slice-off for tax by banks of any sum above 7 lakh sent abroad. E-com players must now comply with Section 194-O of the Income-Tax Act. This requires them to make tax deductions at source (TDS) on amounts above 5 lakh payable to individual sellers (or, oddly, just logged) on their online platforms for revenues drawn by the hawking of goods and services. An e-com operator must deduct 1% for merchants with a PAN or Aadhaar number, and 5% for those without either—even if payments are not routed through it. This deduction is over and above the GST levied on online sales.

While this TDS does not apply to non-resident sellers, its web is wide enough to catch most businesses that hawk their wares on Flipkart, Amazon and a variety of other websites in India. Indeed, the new provision’s motive was to cast a wider tax net, an aim that nobody can quarrel with, given the country’s small base of taxpayers. Those running shady sweat-shop operations off the tax radar and using these platforms as retail outlets will pop up on the tax radar, thanks to TDS data. Such sellers may well find they have no option but to file their tax returns properly if they must stay in business. This is good. The devil, though, might lie in the details of this rule’s implementation. There are signs all around that Section 194-O could be fraught with problems.

The added burden is one aspect. Large e-com operators may be able to shrug off the compliance cost involved in deducting a sliver of the money transferred to hawkers (and sales logged), but small websites trying to emulate such a model may find it much too burdensome. It also complicates life for handymen such as carpenters, plumbers and electricians who offer their services through an e-com operator. They may find 1% or 5% sliced off their entire bill, which typically includes the cost of materials used, instead of their actual earnings. While their overall bills could exceed 5 lakh, this does not necessarily mean they would be liable to income tax. And claiming refunds is never easy. The system’s complexity is another aspect. The CBDT has clarified that payment gateways which facilitate e-com transactions do not have to deduct TDS if a platform has already done it, but which of the two must do this remains hazy and opens up space for discord. The board also clarified that online insurance aggregators or agents need not collect TDS if the deal is only between an insurer and policy-holder after the first year. But our Insurance Act forbids an intermediary from deducting anything from any premium, even the initial one. There are also other perplexities that need to be sorted out before this system can work smoothly. The sooner it’s done, the easier e-com operators will breathe.

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