Provision To Bring Online Sellers Under Tax Net Leaves Scope For Interpretation

Section 194-O was introduced through the Finance Act, 2020, to bring participants of e-commerce within the tax net.  It mandates E-Commerce Operators (ECO) to deduct tax at source on receivables of E-Commerce Participants (ECP) following sales of goods and services by them. This Section was introduced to bring online sellers within the tax net by creating a tax deduction obligation on ECOs. However, the Section's rigours do not stand free of concerns from the commercial standpoint.

Hardship caused to e-commerce platforms

Section 194-O compels e-commerce operators or platforms to deposit tax, deducted at source, even if customers pay sellers directly. Section 194-O assumes that payments are made to e-commerce platforms by buyers. Therefore, the platforms are liable to deduct tax on the transaction and deposit it with the Authorities.

This excessively burdens ECOs for they need to deposit TDS (Tax Deducted at Source) from their pockets to meet their obligation under Section 194-O.

It may impact their working capitals, and they may face difficulty in recovering the amount from sellers.  

As an alternative, it is suggested that suitable amendments may be brought about to cast only a reporting obligation on the platform or the operator while shifting the responsibility of deducting tax on the seller.

Applicability of Section 194-O on payment gateways

The new Section leaves a broad scope for various interpretation that may cast an additional financial burden on payment gateways. It is not very clear whether a payment gateway can be categorised as ECO.

The CBDT has clarified that if a payment gateway qualifies as an ECO, it may not withhold tax if the e-commerce operator withholds tax on the seller's sum.

There can be a scenario where the payment is facilitated by a payment gateway for a transaction over sale or service concluded on the ECO's platform. There can also be a scenario where the payment gateway only facilitates payment transaction following a sale transaction completed otherwise.

In case the ECO is not required to deduct tax, the tax department may cast the liability of withholding tax on the payment gateway. However, there could be other scenarios where payment gateways may be asked to deduct tax if sale proceeds do not involve an ECO. One may contend that a payment gateway cannot be categorised as ECO as they do not facilitate the actual sale of goods or provision of services. However, an amendment or clarification in would go a long way in ensuring that payment gateways are not put to undue hardship of withholding tax under Section 194-O.

 Applicability of Section 194-O

It may be relevant to note that Section 194-O makes no reference to chargeability of the sum in the hands of the payee to ascertain the obligation to withhold tax in the hands of ECO. Therefore, the tax must be deducted at source regardless of whether it would be exempt from the recipient's hands. However, circular No. 4 of 2002 clarifies that tax need not be deducted at source for persons with income exempt under Section 10 of the IT Act. An exhaustive list of persons was made available. It was further modified by Circular No. 7 of 2015 and Circular No. 18 of 2017. However, this list does not include Farmer Producer Organisations (FPOs) or farmers. Therefore, payment made to FPOs and farmers may be exempted from the liability of withholding tax under Section 194-O either by adding them to the abovementioned circular or making suitable amendments to the IT Act.

Raghavan Ramabadran is an Executive Partner, and Abhinov Vaidyanathan is an Associate, at Lakshmikumaran & Sridharan Attorneys

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