Budget 2020 has introduced a new section mandating e-commerce portals to deduct 1 percent TDS (tax deducted at source) from sellers on the gross amount of sales or service or both.
“In order to widen and deepen the tax net, it is proposed to provide that e-commerce operator shall deduct TDS on all payments or credits to e-commerce participants at the rate of 1 percent in PAN/Aadhaar cases and 5 percent in non-PAN/Aadhaar cases,” the finance minister said in her Budget speech.
This is like all the TDS except from salary, which is an ad hoc exercise and the rate depends on the actual computation of income at the time of filing returns. The actual tax liability may be more or less than 1 percent of the turnover.
However, TDS is all about early collection of tax, thwarting any tax evasion. There is a muted criticism on the ground that e-commerce accounts for only 1.6 percent of the total retail turnover, unlike in China where it is 15 percent and much lower than the global average of 14 percent.
Then, they say catch them young. So, it is equally necessary to put the trade through the disciplinary rigour at an early stage itself. The Narendra Modi government has done it before by mandating 1 percent TDS under the Goods and Services Tax (GST) Act.
The relevant amendment to the Income Tax (I-T) Act will take effect from April 1, 2020.
Major players such as Amazon and Flipkart are of the view that it would upset cash flows of every stakeholder in the game.
That said, TDS is the best bulwark against tax evasion as previous experiences have shown. In India, it accounts for a sizeable 40 percent of total I-T collections. The salaried class pays a big chunk of it.
That brings us to the question, if the salaried class can pay TDS, why not the business class?
The government has shown remarkable sensitivity to the plight of small sellers, saying those who are likely to clock Rs 5 lakh or less by way of turnover on a particular e-commerce platform will not be subjected to this TDS regime. For this, they need to provide a declaration to the e-commerce player, besides furnishing their PAN or Aadhaar.
This leeway is available only to individual and HUF (Hindu Undivided Family) sellers selling through e-commerce portals. However, a tax planner, who is also an individual or a HUF, might reach out to two or more e-commerce portals so that in none of them, his sales add up to more than Rs 5 lakh a year.
It has been clarified that TDS of 1 percent has to be deducted only from the gross amount payable by the customer to the seller through the portal. No TDS is required to be deducted from payments made by the portal itself for say, advertisement or other services.
What the buyer pays to the seller is relevant. Consequently, if the portal charges 10 percent as service fee for hosting the seller on its platform, it will not be deductible from the sale price towards TDS.
The big e-commerce players may not be exactly happy with the move, but, the TDS is akin to a national service with an altruistic spirit.
There are many employers which have been discharging this duty all these years. Take for example, TCS and Infosys. While there may be no reward for compliance, penalties kick in for any violation of such rules.
However, as the Indian tax administration comes of age, it is worth considering if there should be more departmental harmony when it comes to TDS. There is no reason why the GST authorities collecting 1 percent TDS should not hand over the dossiers of the sellers to the I-T Department and vice-versa.
Linkages between various arms of the government can remove duplication to a great extent.S Murlidharan is a chartered accountant and columnist. Views are personal.