Taxation of E-Commerce Transactions in Income Tax & GST with Examples

Taxation of E-Commerce Transactions in Income Tax and GST (with Integrated Examples)

There are many taxation provisions affecting the E-Commerce transactions in Income Tax as well as GST. The government is introducing various sections in both the taxation regimes, that is Direct and Indirect Tax so as to evade non-taxation of the transactions and obtaining tax benefit.

Earlier, when there were no provisions on the E-Commerce transactions, small sellers who were selling their goods/ providing services through E-Commerce Operators, the transactions were out of the tax nets and taxes were being avoided. Also, the Non-Resident E-Commerce Operators made profits in India without paying any taxes. So, the Government introduced the following provisions in Income Tax and GST.

Under Income Tax Act

I. Section 194-O (introduced by Finance Act,2020) – E-Commerce operators should deduct TDS @1% on the gross amount of such sales or services or both at the time of credit of the amount of sale of goods, services, or both to the account of an e-commerce participant or at the time of making payment to an e-Commerce participant by any other mode, whichever is earlier.

But the word “gross amount of sales” has not been defined in this case. Let us understand it through an example. Suppose there is sales of Rs 30 lacs and returns of Rs 5 lacs, TDS should be deducted @ 1% on Rs 30 lacs and not on Rs 25 lacs.

Meaning of Certain Terms

i. “E-commerce operator” means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce. An E-Commerce Operator can be a resident or a non-resident in India.

ii. “E-commerce participant” means a person resident in India selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce. Hence, if the E-Commerce participant is a non-resident, no TDS provisions would be applicable.

As per the Explanation to Section 194O, any payment made by a purchaser of goods or recipient of services directly to an e-commerce participant for the sale of goods or provision of services or both, facilitated by an e-commerce operator, shall be deemed to be the amount credited or paid by the e-commerce operator to the e-commerce participant and shall be included in the gross amount of such sale or services for the purpose of TDS.

No TDS is required to be deducted if the amount paid/credited to E-Commerce Participant being an individual/ HUF whose gross amount of such sales or services does not exceed Rs 5 lacs. The limit of Rs 5 lacs shall not be available when the services provided are in relation to hosting of advertisements.

These provisions are applicable even if the purchaser of goods/ recipient of services is a non -resident but does not apply if the E-commerce participant conducts business through its own website.

II. Section 165- Equalization Levy (introduced by Finance Act,2016)– It gets triggered when-

i. A resident person carrying on business/profession in India or

ii. Non-Resident having a permanent establishment in India

makes payment for online/digital advertising to a Non-Resident not having a permanent establishment in India.

Limit- Consideration should exceed Rs 1 lacs per year

Liability to deduct/pay equalization levy- Person paying for Online/Digital Advertising

Rate- 6% of the consideration for online advertising

Exclusions- Advertisement for personal purposes

III.  Section 165A- Equalization Levy (introduced by Finance Act,2020) – It gets triggered when consideration is received by the E-Commerce Operator from e-commerce supply or services provided by it to-

i. A person resident in India

ii. A Non-Resident in the specified circumstances

iii. A person who buys goods or services or both using Internet Protocol Address located in India

Meaning of Specified Circumstances-

i. Sale of Advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement through IP Address located in India; and

ii. Sale of data, collected from a person who is resident in India or from a person who uses IP Address located in India

Limit- Sales/Turnover of E-Commerce Operator should exceed Rs 2 crores per year from sale of goods/services

Liability to deduct/pay equalisation levy- E-Commerce Operator

Rate- 2% of the consideration

Exclusions-  i) E-Commerce Operator has Permanent Establishment in India or,

ii) Transaction is within scope of Section 165. 

Under GST Act

I. Section 52 of CGST Act,2017- Every electronic commerce operator shall collect an amount calculated at such rate not exceeding one per cent, as may be notified by the Government on the recommendations of the Council, of the net value of taxable supplies made through it by other suppliers where the consideration with respect to such supplies is to be collected by the operator.

As per the Explanation, “net value of taxable supplies” shall mean that the taxable supplies returned to the suppliers shall be reduced from the gross value of taxable supplies.

Limit – No such limit specified

Liability to collect tax – E-Commerce Operator

Rate- 0.5% of Net Value of Taxable Supplies as CGST and SGST each (Intra-State Sale)

1% of Net Value of Taxable Supplies as IGST (Inter-State Sale)

Payment of TCS with Department- Within 10 days after the end of the month in which TCS was collected

Filing of Monthly Statement- Within 10 days after the end of the month in which TCS was collected

Filing of Annual Statement- On or before 31^st Day of December following the end of such FY

Credit Claimed- Supplier will claim credit of TCS in his Electronic Cash Ledger

Matching of Outward Supplies- Outward supplies shown by the Suppliers in their returns will be matched with outward supplies shown by the E-Commerce Operators.

II. Section 9(5) of CGST Act,2017-

i. Passenger Transport Service by Cab or Motorcycle – 100% tax payable by ECO, irrespective of the fact whether cab operator is registered or not

ii. Accommodation for lodging or residential purposes in hotels, inns, etc. –

i. Hotels, etc. are liable to register- ECO is not liable to pay tax

iii. Hotels, etc. are not registered- ECO is liable to pay tax

iii. Housekeeping, Plumbing, Carpeting-

i. Plumbers, etc. are liable to register- ECO is not liable to pay tax

ii. Plumbers, etc. are not registered- ECO is liable to pay tax

Contradiction between Income Tax and GST

As it can be observed that TDS u/s 194O of Income Tax Act and Section 52 of CGST Act creates a liability on the electronic commerce operators to deduct TDS under the Income Tax Act and collect tax under GST Act respectively on the same transaction. 

Integrated Example 1- Supplier Mr Rajesh (Resident) makes the following inter-state sales through the E-Commerce Operator Alpha Ltd to its customers:

So, in the above case, Gross Sales is 25 lacs, Net Sales is 20 lacs which is net of Sales Returns and exclusive of GST. Hence, Alpha Ltd will deduct TDS under Income Tax Act @1% on 25 lacs which is Rs 25,000 and collect TCS under CGST Act @1% on 20 lacs which is Rs 20,000. Suppose Alpha Ltd charges 5% as commission which comes to Rs 1,00,000 (5% of 20 lacs) and charges 18% GST on it, total commission is Rs 1,18,000.

There is no liability on Mr Rajesh to deduct TDS under Section 194H on the commission it pays to Alpha Ltd since Section 194O overrules the entire chapter of TDS.

Total payment to be made by Alpha Ltd to Mr Rajesh is shown below:

Mr Rajesh will be able to claim the TCS of Rs 20,000 in Electronic Cash Ledger and utilise/ claim refund of the same. TDS of Rs 25,000 can be claimed in the Income Tax Return.

Integrated Example 2- Mr Rahul (Resident) sells its products in India through Beta Inc which is a Non-Resident E-Commerce Operator. Total Sales of Rs 10 crores are made.

As per Section 194O, E-Commerce Operator includes Residents as well as Non-residents. Hence, Beta Inc is required to deduct TDS @ 1% on Rs 10 crores which is Rs. 10 lacs.

Beta Inc shall also be liable to 2% Equalization Levy on Rs 10 Crores under Section 165A introduced by Finance Act, 2020.

Integrated Example 3- If in example 2, instead of sale of goods, it would have been advertisement services/ digital marketing then Section 194O and Section 165 both would get triggered.

Beta Inc would deduct TDS u/s 194O @ 1% on Rs 10 Crores which is Rs 10 lacs.

Mr Rahul would be liable to deduct/pay equalization levy @ 6% on Rs 10 crores u/s 165 introduced by Finance Act,2016.