E-commerce is the activity of electronically buying or selling of products on online services or over the Internet.
The history of e-commerce begins with the first ever online sale: on the August 11, 1994 a man sold a CD by the band Sting to his friend through his website NetMarket, an American retail platform. This is the first example of a consumer purchasing a product from a business through the World Wide Web or “e-commerce” as we commonly know it today.
Global retail e-commerce sales are projected to reach $27 trillion by 2020.
E-commerce platforms have been a major boon for new and budding companies, providing pan India customer base and a host of other services in helping them grow. E-Commerce has grown tremendously in India as more users are buying and selling items online, thanks to smartphones and internet connectivity.
E-Commerce, in layman terms has often been restricted to the business performed by Amazon, Flipkart or Snapdeal etc. However, e-Commerce also covers within its ambit the businesses of Ola, Uber, Zomato, Swiggy, Book My Show, Make my Trip, etc.
As per Nasscom (National Association of Software and Service Companies) about 235 Million entities are involved in such online transactions directly or indirectly, which is very large and requires tax regulation. Since, the volume of transactions is also quite huge, it becomes very necessary to bring such transactions under TDS net, not only from revenue generation point but also to track transactions and to get new taxpayers.
In this backdrop, the Central Government in order to widen and deepen the tax net by bringing participants of e-commerce within the ambit of tax, through the Union Budget 2020-21 has proposed to insert a new section ‘194-O – Payment of certain sums by e-commerce operator to e-commerce participant’, discussed below. The Finance Act received Presidential assent on 27 March 2020.
E-Commerce Operator: An e-Commerce operator is a person who owns, operates, or manages a digital/electronic facility for the sale of goods and services. He is responsible for making payments to the e-Commerce participant on such sales.
E-Commerce Participant: An e-Commerce participant is a person who sells goods, services, or both through an electronic facility provided by an e-Commerce operator. He must be a resident of india.
However, working with e-commerce platforms attract lots of compliance issues and complexities which one might be caught unaware. This article will focus on coverage of important compliance to be done by E-commerce sellers with respect to Income Tax and Goods and Services Tax provisions.
Under earlier tax laws, there was no clear treatment of online sales. GST has proper rules in place for e-commerce portals like Amazon and its sellers.
Income Tax TDS Provisions
This is one area which is often missed out even by tax professionals. While selling goods or providing services through e-commerce platforms, the e-commerce operator (e.g. Amazon, Flipkart, Udaan etc) charges commission for sales made and fee for other services like shipping, handling, referral, fixed fee etc. These charges are often deducted from the settlement done by e-commerce operator.
Here lies the catch. These platform usage charges (commission, shipping etc.) are expenses for the business of E-commerce seller and attract TDS provisions i.e. if TDS is not deducted and paid on these expenses, you will end up paying income tax on these expenses too i.e. these will be disallowed while computation of taxable income. Following TDS provisions are attracted:
|NATURE OF FEE||SECTION ATTRACTED||TAX TO BE DEPOSITED|
|Closing Fee/Fixed Fee||194C||2%|
To help businesses comply with these provisions, operators like Amazon and Flipkart follow a policy of Reimbursement of TDS subject to submission of Form 16A with them. The process is as follows:
1. It starts with depositing TDS with income tax authorities,
2. Obtaining the TDS certificate in Form 16A
3. Creating a reimbursement request with the E-commerce operator and submitting the TDS certificate and;
4. Finally receiving the TDS amount as reimbursement.
This entire process is lengthy and time-consuming but at the same time saves the business from unnecessary TDS penalties and disallowance of expenses paid to e-commerce platforms later during assessment proceedings.
Section 194O has been introduced in the Union Budget 2020. According to Section 194O, an e-Commerce operator is required to deduct TDS for facilitating any sale of goods or providing services through an e-Commerce participant. TDS on e-commerce operators under section 194-O is applicable from 1 October 2020.
E-Commerce operators should deduct TDS @1% 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.
However, in case of e-commerce participant being a resident individual or HUF, E-commerce operator is not required to deduct TDS if the gross amount of sale of goods, services, or both during the previous year does not exceed Rs 5 lakh and if the e-Commerce participant has furnished his PAN or Aadhaar.
If the e-Commerce participant does not furnish his PAN or Aadhaar, TDS must be deducted at the rate of 5%, as per provisions of Section 206AA.
In case of e-commerce participant being a non-resident, as stated earlier, an e-Commerce participant must be a resident of India. Thus, no TDS will be deducted if the participant is a non-resident.
Let suppose a proprietary firm M/s. ABC Enterprises (e-commerce participant) is selling its products through Amazon (e-commerce operator). Mr U buys this product online from ABC Enterprises for Rs 50,000 on 1 October 2020.
Amazon credits the account of ABC Enterprises on 1 October 2020.
Here, Amazon is required to deduct TDS @1% on Rs 50,000 at the time of credit to the party or making payment, whichever is earlier. In this case, TDS should be deducted on 1 October 2020.
Purpose of Section 194O
The purpose of the introduction of Section 194O is to widen the TDS base by bringing e-Commerce participants under the tax. Customers prefer digital platforms for buying or selling of goods and services because:
From the sellers’ perspective: It requires less cost for creating the setup and less effort for the search of buyers.
From the buyers’ perspective: Many options are available at one platform and the comparison of products becomes very easy.
This has resulted in an increase in the number of e-Commerce users over a period of time as NASSCOM stated about 235 Million entities are involved in such online transactions directly or indirectly. It is difficult to identify small sellers (e-Commerce participants) who don’t file their income tax returns. Thus, the government has enlarged the tax base to bring such e-Commerce participants under the tax base.
Exceptions to Section 194O, if any
1. Non-resident e-Commerce participants are exempted from the scope of this section.
2. A ceiling limit of Rs 5 lakh is set only for resident individuals and HUF. Thus, an e-Commerce operator is not required to deduct TDS if the amount, paid or credited to individuals/HUF during a financial year, does not exceed Rs 5 lakh.
Law before Section 194O
Earlier, there was no tax deduction on payments made to e-Commerce participants. They were required to independently file their income tax returns. Therefore, many small e-Commerce participants didn’t file their income tax returns and escaped the tax liability.
The introduction of Section 194-O will result in an increase in the revenue for the government by reducing tax evasion.
|Section 197: Certificate for deduction at lower rate
For TDS under 194-O, lower deduction certificate can be obtained by the assessee.
Goods and Services Tax TCS Provision
|GST Registration: The e-commerce operators as well as the e-commerce participants supplying goods or services through an operator need to compulsorily register under GST. The threshold limit is not applicable to them.|
Section 52 of the CGST Act, 2017 provides for Tax Collection at source, by e-Commerce operator in respect of the taxable supplies made through it by other suppliers, where the consideration in respect of such supplies is collected by him.
Rate: 1% (0.5% as CGST & 0.5% as SGST)
Applicability: TCS have been made applicable on e-commerce platform with effect from 01st October 2018.
Matching of details of supplies:
The details of the supplies, including the value of supplies, submitted by every operator in the statements will be matched with the details of supplies submitted by all such suppliers in their returns. If there is any discrepancy in the value of supplies, the same would be communicated to both of them. If such discrepancy in value is not rectified within the given time, then such amount would be added to the output tax liability of such suppler. The supplier will have to pay the differential amount of output tax along with interest.
Tax Collected at Source (TCS) under GST means the tax collected by an e-commerce operator from the consideration received by it on behalf of the supplier of goods, or services who makes supplies through operator’s online platform. TCS will be charged as a percentage on the net taxable supplies.
E-commerce operators are liable to collect TCS. TCS applies only if the operators collect the consideration from the customers on behalf of vendors or suppliers (E-commerce participants). In other words, when the e-commerce operators pay the consideration collected to the vendors they have to deduct an amount as TCS and pay the net amount.
Here are few exceptions to the TCS provisions for the services provided by an e-commerce platform:
1. Hotel accommodation/clubs (unregistered suppliers)
2. Transportation of passengers – radio taxi, motor cab or motorcycle
3. Housekeeping services like plumbing, carpentry etc. (unregistered suppliers)
The flow of TCS is as follows:
For instance, a supplier sells his product worth Rs. 10,000 through Amazon (total amount being 10,000 + GST@18% = 11,800). The entire amount would be collected by Amazon. This revenue would be transferred to the supplier by Amazon after deducting 1% tax (i.e. Rs. 100), which is called TCS. Net amount transferred will be Rs. 11,700. This 1% TCS would be remitted to the government. The TCS (Rs. 100) remitted by the e-commerce operator will be provided as credit to the supplier.
This exercise allows the government to track non-reporting of sales transactions by E-commerce sellers.
Another concern is about book keeping of E-commerce participants and its audit under Income Tax Act as well as GST Act, Which I will compile in later article.