194-O, New TDS Provision: Cause of Confusion and Difficulties for E-Commerce Businesses

The Finance Bill 2020 has introduced a new provision to mandate Electronic Commerce Operators (ECOs) for deducting TDS in respect of the amount payable to the seller on any sale of goods and services. Although, there already exists in the GST Act a similar provision of collecting tax at source (TCS) by the ECOs, such collection is limited only if the ECO is responsible for collecting the sale amount from the buyer.

For the first time,TDS is proposed on the amount payable with respect to sale ofgoods, and second, the ECO is mandated to pay the TDS to the Government irrespective of whether any ECO is involved in collecting the sale amount from the buyer. 

In this article, we are examining the confusion and difficulties that are likely to be caused to the stakeholders in the space of electronic commerce, because of this provision. 

The salient features of Section 194-O are as below:

• An ECO is liable to deduct TDS @ 1 per cent.

Though the provision appears innocent and simple, given the complexity of the E-Commerce Business the new provision is likely to pose huge challenges for compliance.  We have tried to capture some of the following challenges: 

Collection Of TDS Through The ECO

One of the key challenges for any ECO is to deduct TDS on all supply transactions, irrespective of whether the amount is being collected by the ECO. 

The TCS provision under the GST Act provides that only when consideration for supply is collected by the ECO, TCS is required to be charged and collected by the ECO from the suppliers. Therefore, the GST law appreciated the business wisdom that wherever the ECO has been acting as a collection agent for the suppliers, the ECO should also collect TCS and deposit it with the Government exchequer and not otherwise.

On the contrary, the TDS provisions under the proposed Finance Bill, 2020 deviates from the commercial and business rationale provided in the GST Act. The new provision fails to appreciate how the ECO can be asked to deduct TDS, where the payment for goods or services is not routed to the supplier through the ECO. Explanation to Section 194-O (1) expressly provides that the ECO should deduct TDS and deposit it with the Government even if the payment is not being collected through the ECO. 

Thus, the Government mandates the ECOs to pay tax on behalf of the supplier, even though the supplier might be receiving the full payment directly from the buyer. In this scenario, the Government has failed to appreciate that the ECO will experience immense difficulties in recovering the TDS from the suppliers. Hence, the cost of such TDS may be borne by the ECO, if the TDS is not reimbursed by the supplier to the ECO.  

By introducing such provisions, the Government is ensuring ‘ease of collecting tax’ at the cost of ‘ease of doing business’ in India! This is certainly contrary to the narrative of the Government; unfortunately, this is the ground reality which the industry will have to face! 

The only option available to the ECO would be to amend its terms of the contracts with the suppliers to incorporate a suitable term in the contract to either add the TDS to its commission for rendering the EC services or to collect TDS in advance before effecting the sale of goods or services.  

Service And Cancellation Charges

Cancellation of orders or return to the suppliers is also a regular phenomenon in the electronic commerce world. For example, online food orders placed through the ECO may be cancelled, inviting cancellation charges payable by the customer to the supplier. 

However, a question arises as to whether such cancellation charges would attract TDS. It is interesting to note that this was highly debated issue under the erstwhile service tax regime and it would continue to trouble taxpayers even in the current GST regime. The revenue authorities have been contending that the cancellation charges should be treated as the consideration for ‘agreeing to the obligation to refrain from an act or to tolerate an act’; on the other hand, the assessees have been contending that such cancellation charges are merely a compensation for the loss which cannot be treated at par with consideration and, accordingly, not taxable. It is interesting to note that it is still a disputed question under foreign VAT legislations as well.

Where any ECO has decided to litigate Service Tax or GST demand on cancellation charges, such ECO will have to revisit its litigation strategy in view of the new TDS provision introduced in the Finance Bill, 2020. It will be necessary for these ECOs to reconcile their positions harmoniously considering the new TDS provision. 

Aspect Of Sales Returns 

For good reasons, sales return is a very common trade practise in the e-commerce industry. Thus, tax laws should recognise the value of sales return similar to what is being provided under the GST Act, under, which there is a provision for issuance of credit note for sales return and reduction of tax liability. 

Under the GST Act and regulations made thereunder, TCS is to be collected on the net taxable value of the supplies of goods or services after considering the value of sales returns. Section 194-O, on the other hand, does not provide any clarity as to whether TDS would apply on the net value after deducting the value of the sales return. This would also keep the ECO pondering whether to deduct TDS on the reduced value, particularly when the TDS has to be paid by the ECO from its own pocket.  

Discounts

Every industry has its unique way of offering discounts for business promotion. The ECOs are not exception and they have also introduced innovative schemes for offering business discounts. 

Normally, the ECOs offer discount on the total value of supplies. Refer to the above online food transaction and consider the following scenario: As per the list price, a restaurant charges Rs. 100 for food and the ECO charges a delivery fee of Rs. 20. Thereby making the total amount payable by the customer as Rs. 120. However, the ECO provides various offer promotion codes and offer net discounted price of Rs. 80. The discount of Rs. 40 is applied to the ECO charges as well as to the restaurant charges. The said additional discount is being compensated by the ECO to the restaurants. 

The question is whether the payment made by the ECO to the restaurant should be liable for the TDS on Rs 120, even though only Rs. 80 is received from the buyer. One can say that the amount paid by the ECO to the restaurant is a third-party consideration and, therefore, it should attract tax withholding. However, this will keep haunting the e-commerce industry given the ever-changing business models. 

Challenges In Calculating The Threshold

An ECO is not required to deduct TDS on a sale of goods or services to an individual or to a HUF, where the value of such transactions does not exceed Rs. 5,00,000/- annually. Given the variety of issues including those related to discount and sales return, it would be a challenge for the ECOs to calculate the threshold.

The Last Words

For the purpose of illustration, we have discussed only a few issues that may arise due to introduction of the new provision. There could be other manifold issues which could crop up depending upon the varied business transactions in the e-commerce world. Also, being a new business platform, at least in India, there are good reasons to believe that the e-commerce transactions being complicated, the revenue authorities are likely to wrongly interpret the provisions or the transaction. Such wrong interpretations of the provision or transaction can cause problems for the businesses.  

It is necessary for the ECOs to thoroughly understand the GST Act and the Income Tax Act provisions before taking any stand on various transactions. Further, the ECOs should also proactively represent such issues before the Government. The Government should recognise the promise of the new technology platform for providing and promoting an effective channel for distribution of goods produced by MSME players and accordingly provide optimum, unambiguous, and easy tax framework under both the Direct Tax and the Indirect Tax regulations.

The author is the Partner & Rinku Panbude, Principal Associate, Lakshmikumaran & Sridharan Attorneys