- By Dr Niranjan Hiranandani
Ease of Doing Business for MSMEs: E-commerce, a sunrise industry in India, has driven massive investments in infrastructure and logistics in the past decade. It has created lakhs of direct and indirect jobs, and aided wealth creation across the country, with major impact being seen in Tier II and Tier III cities. Growing at a fast pace, e-commerce has also come under the unwarranted lens of regulators to collect more taxes and with ever-increasing compliance burden. So much so that the industry has been witnessing a very high frequency of regulations being imposed in the relatively early growth stage itself. There is an imminent need to rationalize policy-making for e-commerce and internet companies keeping in mind implications on the sector’s growth and its contribution towards job creation.
The Finance Act 2020 has inserted a new section 194-O in the Income Tax (IT) Act relating to payment by an e-commerce operator (or operator) to an e-commerce participant (or online seller(s)). This requires the e-commerce operators to deduct income tax (TDS) at the rate of 1 per cent of the gross amount of sale of goods/ services/ both, at the time of credit of the amount of sale to the account of the e-commerce participant.
Online retail (or e-commerce) as a percentage of overall retail in India is roughly 3 per cent, implying a small online seller base. Section 194-O also gives exemption for online sellers with gross merchandise sale of less than Rs 5 lakh in the previous year. This will result in a minority seller base (as a percentage of overall retail) that would pay the proposed TDS and thereby fail to achieve the objectives at scale. Implementation in the current form can be considered by bringing down the proposed TDS rate down (to say 0.25 per cent) to minimize cash flow impact for MSME. This will help reduce the amount of working capital that gets blocked and more importantly in these pandemic times, it would be a big relief.
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 under the GST law is calculated at the rate of 1 per cent of the net value of taxable supplies, which also takes into consideration returns (which are around 30 per cent for e-commerce companies). In order to ensure consistency in provisions, the Government of India may consider applying a similar Net Sale Consideration (excluding GST and fees/ charges payable to operators) post returns. Along with the consideration in (2) this would further help in minimising the amount of working capital of online sellers getting blocked while adhering to the no tax-on-tax principle.
The Finance Act 2020 has also added a new clause 1h in Section 206-C in the Income Tax (IT) Act which stipulates that every seller who receives sale consideration for goods exceeding Rs 50 lakh in any previous year shall collect from the buyer TCS of 0.1 per cent of the sale consideration exceeding Rs 50 lakh. This multiplicity in taxation will lead to increased compliance and blocking of working capital. This is bound to result in a manifold increase in the cost of doing business across the entire supply chain of supplier, wholesaler/trader and seller.
The data collected on sellers through TCS collected by operators, along with data on sellers (offline and online) under the expanded scope of Section 206-C will be a sufficient measure for the income tax authorities to check for tax evasion across majority sellers. Hence there is a need for Government of India to reconsider implementing 206-C (1h) in order to minimise the number of taxable transactions to enhance the ease of “Ease of Doing Business”.
The government should recognize the potential that these e-commerce platforms hold as a robust distribution channel for India’s largest employment provider- the MSME sector. Therefore, it should work towards providing and building an ecosystem with enabling framework of simplified Tax Regulations!! E-commerce sector calls for the same nurturing as India has done for its IT Sector.
