Insights
TDS on online sale is a way to recover tax from digital India
February 1, 2020The obligation to deduct TDS is not cast on the buyer or service recipient but on the online platform, which channelizes the payment on behalf of the buyer and seller. From a policy standpoint, casting an obligation on the buyer would have been onerous since most consumers are individuals and online transactions are faceless.
E-commerce transactions have now become commonplace in India, where transactions between buyers and sellers of goods and services are facilitated by online platforms and marketplaces. Given that these transactions are conducted through formal banking channels and leave a digital trail, it is small surprise that the taxman is now looking to extend TDS provisions to them.
Finance Bill, 2020, provides that online platforms will be required to deduct TDS on sale of goods or provision of services facilitated by or through their electronic platform at 1 per cent. Interestingly, the obligation to deduct TDS is not cast on the buyer or service recipient but on the online platform, which channelizes the payment on behalf of the buyer and seller. From a policy standpoint, casting an obligation on the buyer would have been onerous since most consumers are individuals and online transactions are faceless.
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On the other hand, casting onus on the online platform, which aggregates the payments for the seller as a mere agent is an easier choice from a tax recovery standpoint. On the flipside, TDS compliance will become cumbersome for the online platform. More so, in case of TDS on online services, the TDS provisions are only triggered where the service falls within the purview of Section 194J (technical or professional services).
This will mean that the online platform will need to undertake a classification analysis on each payment routed through it for provision of service to ascertain whether it falls under the purview of Section 194J.
The new TDS also puts online transactions at a disadvantage from the brick and mortar format, Presently, TDS provisions are not applicable to the purchase and sale of goods at physical stores. However, by subjecting online sales to TDS, sellers will be less inclined to sell online, especially where profit margins run low.
Additionally, the tax proposal provides that an online platform is required to deduct TDS even where the payment is not routed through it. In other words, even the case of online sales where the buyer pays directly to the seller, the online platform is required to deduct TDS. This will mean that in such cases the online platform may have to go out of pocket to deposit TDS on behalf of the seller. Alternatively, online platforms will need to reach contractual arrangements with sellers to recover such TDS.
Interestingly, the new TDS provision only applies in the context of resident sellers or service providers. In case of goods or services purchased from offshore, the provisions of Section 195 would continue to be applicable. Assuming that tax is payable by a non-resident seller, tax authorities may argue that even in such cases the online platform and not the buyer or service recipient should deduct TDS.
As a small respite, the new TDS provision is not applicable where the seller’s (being an individual or HUF) total sales through the online platform is less than Rs 5 lakh in the previous year.
The new TDS provision marks the Government’s first attempt to tailor the TDS provisions for online transactions. The ramifications may be widespread as new stakeholders and transactions are brought into the TDS net.
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Disclaimer
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
