Govt must lower 1% TDS on e-commerce deals to reduce cash liquidity impact for MSME sellers

E-commerce, a rising industry in India, has provided humongous investments in infrastructure and logistics in the last 10 years. It has even generated innumerable number of direct and indirect jobs, and assisted money generation in the entire country, with chief effects witnessed in Tier II and Tier III cities. Evolving at a quicker rate, the e-commerce has attracted unwanted attention of regulators and led to imposition of more taxes and compliance burden. The sector has seen a large number of regulations being thrust into the earlier stage itself. This has to be stopped as there is a requirement to liberalize policy-making for e-commerce and internet companies to back the sector’s growth as it has generated a lot of jobs.

The Finance Act 2020 has included a fresh section 194-O in the Income Tax (IT) Act regarding payment by an e-commerce operator (or operator) to an e-commerce participant (or online seller(s)). This warrants the e-commerce operators to reduce income tax (TDS) at the rate of 1 per cent from the cumulative amount of sale of goods/ services/ both, during credit of the amount of sale in the account of the e-commerce participant.

Online retail (or e-commerce) in terms of percentage of entire retail in India comes to around 3 per cent, meaning a minor online seller base. Section 194-O also exempts online sellers from gross merchandise sale of less than Rs 5 lakh from the last year. This leads to a minority seller base (as a percentage of overall retail) that would give the concerned TDS and thereby defeat the whole objectives. Implementation in the present manner can be looked into by reducing the concerned TDS rate (to say 0.25 per cent) to cut down cash flow impact for MSME. This will aid in bringing down the amount of working capital that gets blocked and critically in these pandemic times, it will do a world of good.

The government can look towards changing the base for TDS calculation from Gross to Net Sales Consideration which is exclusive of GST and fees to operators. The proposed calculation of TDS on Gross Sale Amount, which includes GST, is a case of enforcing a tax-on-a-tax. Along with TCS, the combined impact on blocked working capital would be greater than two percentage points. This would put online sellers working under a high-volume, low-margin model under immense pressure.

TCS collection as the GST law is computed at 1 per cent of the total value of taxable supplies, which even factor in returns (which happened to be roughly 30 per cent for e-commerce companies). In a bid to have consistency in provisions, the Government of India might go for the same Net Sale Consideration (excluding GST and fees/ charges payable to operators) after returns. Together with the consideration in (2) this would also assist in reducing the amount of working capital of online sellers getting blocked while following the no tax-on-tax principle.

The Finance Act 2020 has even included a new clause 1h in Section 206-C of the Income Tax (IT) Act which mandates that all sellers getting sale consideration for goods beyond Rs 50 lakh in any preceding years shall take it from the buyer TCS of 0.1 per cent of the sale consideration going above Rs 50 lakh. This multiplication in taxation will result in strict compliance and blocking of working capital. This can lead to a super hike in the cost of doing business across the whole supply chain of supplier, wholesaler/trader and seller.

The data gathered on sellers via TCS collected by operators, together with data on sellers (offline and online) as per the extended scope of Section 206-C will be an adequate measure for the income tax authorities to curb tax avoidance across majority sellers. So, the Government of India has to reassess the implementation of 206-C (1h) in a bid to reduce the amount of taxable transactions to improve the Ease of Doing Business.

The government has to understand the importance of these e-commerce platforms as they happen to be the distribution medium of India’s biggest job provider- the MSME sector. Therefore, it should look at offering and developing an ecosystem having convenient Tax Regulations. E-commerce sector has to be accommodated the way the IT Sector has been in India.

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