REPRESENTATION BEFORE MINISTRY OF FINANCE W.R.T. EXPLAINATION TO SEC 194-O: BEING DIFFICULT TO IMPLEMENT AND INCONSISTENT WITH SECTION 198 OF INCOME TAX ACT

[Vivek Jalan]

The Finance Bill 2020 has introduced a new Section 194-O to mandate Electronic Commerce Operators for deducting TDS in respect of the amount payable to the seller on sale of goods and services. The First Explanation to the said Section is difficult to implement and is also inconsistent with Section 198 of The Income Tax Act. The same is deciphered in the article below.

SCOPE OF TDS ON E-COMMERCE TRANSACTIONS UNDER SECTION 194O -

• TDS @1% is to be paid by the E-commerce Operator for the facilitation of selling of goods/provision of services provided by it through its digital or electronic facility or platform.

• E-commerce operator is required to deduct TDS at the time of credit or payment, whichever is earlier.

• This section will be applicable on e-commerce participant being resident in India, selling the goods / providing services through E-commerce platform. For non-residents E-Commerce participants this section will not applicable.

• E-commerce operator is not required to deduct TDS If, the amount paid or credited to Individuals or HUF (having PAN or Aadhaar) during the previous year does not exceed ₹ 5,00,000.

• A transaction in respect of which tax has been deducted by the e-commerce operator under this section or which is not liable to deduction under the exemption as provided In this Section, shall not be further liable for TDS under any other provision of Chapter XVII-B of the Act.

• This exemption will not apply to any amount received or receivable by an e-commerce operator for hosting advertisements or providing any other services which are not in connection with the sale of goods or services referred to in 194O(1).

• First explanation to Section 194-O, provides that If a buyer of goods or service has made payment directly to e-commerce participant it shall be deemed that payment has been made by E-commerce operator or account has been credited by E-commerce operator and same shall be added in gross amount for the purpose of deduction of tax.

The only way an E-Commerce Operator can ensure compliance with this provision is to raise a debit note to the supplier along with its own invoice for Service Charged.

HARDSHIP DUE TO FIRST EXPLANATION TO SECTION 194-O

First explanation to Section 194-O, is the biggest challenge for any E-Commerce Operator to implement. It deviates from the commercial and business rationale. It fails to appreciate the fact as to how the E-Commerce Operator can be asked to deduct TDS, where the payment for goods or services is not routed to the supplier through the E-Commerce Operator. It mandates the E-Commerce Operators to pay tax on behalf of the supplier, even though the supplier might be receiving the full payment directly from the buyer. The E-Commerce Operator shall experience immense difficulties in recovering the TDS from the suppliers. Hence, if the cost of such TDS is not reimbursed by the supplier and is required to be borne by the E-Commerce Operator, it may even result in its business becoming unviable.

Further more the provision is inconsistent with Section 198 of The Income Tax Act 1961 which requires that the TDS so deducted shall be deemed to be the income of the deductee. In the instant case, even if the TDS amount is reimbursed by the supplier to the E-Commerce Operator, it shall not become the income of the supplier as it would have already received the entire sum from the buyer directly.

The extract of Section 198 is as follows -

198. All sums deducted in accordance with 1[the foregoing provisions of this Chapter] shall, for the purpose of computing the income of an assessee, be deemed to be income received ….

TEXT OF SECTION 194-O IS PROVIDED AS FOLLOWS FOR EASE OF REFERENCE:

Payment of certain sums by e-commerce operator to e-commerce participant.

194-O. (1) Notwithstanding anything to the contrary contained in any of the provisions of Part B of this Chapter, where sale of goods or provision of services of an e-commerce participant is facilitated by an e-commerce operator through its digital or electronic facility or platform (by whatever name called), such e-commerce operator shall, at the time of credit of amount of sale or services or both to the account of an e-commerce participant or at the time of payment thereof to such e-commerce participant by any mode, whichever is earlier, deduct income-tax at the rate of one per cent of the gross amount of such sales or services or both.

Explanation.-For the purposes of this sub-section, 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 deduction of income-tax under this sub-section.

(2) No deduction under sub-section (1) shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of an e-commerce participant, being an individual or Hindu undivided family, where the gross amount of such sale or services or both during the previous year does not exceed five lakh rupees and such e-commerce participant has furnished his Permanent Account Number or Aadhaar number to the e-commerce operator.

(3) Notwithstanding anything contained in Part B of this Chapter, a transaction in respect of which tax has been deducted by the e-commerce operator under sub-section (1), or which is not liable to deduction under sub-section (2), shall not be liable to tax deduction at source under any other provision of this Chapter:

Provided that the provisions of this sub-section shall not apply to any amount or aggregate of amounts received or receivable by an e-commerce operator for hosting advertisements or providing any other services which are not in connection with the sale or services referred to in sub-section (1).

(4) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty.

(5) Every guideline issued by the Board under sub-section (4) shall be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the e-commerce operator.

(6) For the purposes of this section, e-commerce operator shall be deemed to be the person responsible for paying to e-commerce participant.

Explanation.-For the purposes of this section,-

(a) “electronic commerce” means the supply of goods or services or both, including digital products, over digital or electronic network;

(b) “e-commerce operator” means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce;

(c) “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;

(d) “services” includes “fees for technical services” and fees for “professional services”, as defined in the Explanation to section 194J.]

CONCLUSION:

The said explanation being Draconian and inconsistent with other provisions of The Act, we have represented before the Ministry of Finance to reconsider the same. It may be noted that The CBDT has under Sub-Section (4) of the same Section retained the power to issue guidelines for the purpose of removing the difficulty, if any, faced in giving effect to the provisions of this Section. Hence it may invoke the said powers  to remove this difficulty. In the meantime, from 1st October 2020, in case of impossibility of implementation, the E-Commerce Operators should certainly make individual submissions to their Assessing Officers and to The Board regarding their inability, if any, to comply with the provisions.