[By Sridattha Charan]
The author is a student of Symbiosis Law School, Pune.
With the development of information and communication technology, the procurement and the supply of goods and services through electronic commerce (“e-commerce”) platforms have undergone a multi-faceted expansion all around the globe, including and especially in India.[i] Considering the growth of these e-commerce transactions, the Government of India has recently introduced Section 194-O in the Income Tax Act through the Finance Act, 2020.[ii] Section 194-O of the Act states that an e-commerce operator shall deduct tax at the time of credit to the e-commerce participant at the rate of 1 percent on the gross amount of the sale of goods or services or both. This deduction would be made at the time of credit of the amount to the account of the e-commerce participant.[iii]
Section 194-O was introduced to pave the way for digital taxation in India. It seeks to widen and deepen the tax net on e-commerce transactions. However, the provision suffers from various discrepancies and inconsistencies with the pre-existing regulatory and taxation mechanisms. The author seeks to analyze and examine three such complications that arise with the introduction of the provision.
Firstly, the effect of the Central Goods and Services Act, 2017 on Section 194-O since both the taxation frameworks seek to levy a tax on e-commerce transactions; secondly, the burden placed on the e-commerce operators due to the mandatory nature of the provision with respect to the concept of “direct payment”; and lastly, the inconsistency between Section 194-O and the “Guidelines on Regulation of Payment Aggregators and Payment Gateways” issued by the Reserve Bank of India (“RBI”).
These inconsistencies would create complications in the compliance of the e-commerce operators and give rise to a multitude of implementation hardships for the Revenue Department. Therefore, the question of the dispensability of the provision itself should be examined beginning with the legislative intent behind it.
Legislative Intent behind the Introduction of Section 194-O
Section 194-O of the Act mandates the e-commerce operator to deduct tax at source from the gross amount of sales consideration payable to the seller. The legislative intent behind this provision was explicitly mentioned in the Explanatory Memorandum.[iv] The provision was introduced in order to “widen and deepen” the tax net by bringing the e-commerce transactions under ambit of the Tax deduction at source (“TDS”) provisions under Chapter XVII-B of the Act.[v] The existing provisions of Chapter XVII-B are not applicable when a resident sells his goods through an e-commerce platform.
The rationale behind placing the withholding obligation on the e-commerce operators could be that the sales proceeds for such transactions are routed through such operators. Accordingly, they possess the ability to access and control the sale proceeds and consequently possess the ability to withhold tax.[vi]
Further, in e-commerce transactions, the purchasers could largely be individuals, and placing the responsibility of withholding tax on these individuals would not be consistent with the general approach adopted under Chapter XVII of the Act. Therefore the responsibility of withholding tax is not given to the purchasers but rather to the e-commerce operators.
Implications of the Central Goods and Services Act, 2017
Under the Central Goods and Services Act, 2017, a seller or an e-commerce participant is required to charge Goods and Services Tax on the sales consideration received.[vii] The amount received from the purchaser or the customer includes the Goods and Services Tax (“GST”) and the sales consideration together. The issue that arises in this situation is, whether the tax which would be withheld under Section 194-O would be levied on the total amount including the GST or excluding the GST.
To illustrate, assuming that the sales consideration for a particular product or service is INR 1000 and the GST on the transaction amounts to INR 50. The issue would be the value of the ‘gross amount’, whether it would be INR 1000 or INR 1050. If the ‘gross amount’ is taken as INR 1050, it would result in the deduction of the TDS amount from the GST amount.
However, it has been the general observation of the Central Board of Direct Taxes (“CBDT”) that TDS from tax is avoided. The CBDT has issued various circulars in pursuance of the same.[viii] A striking example would be the clarification provided by the CBDT that the TDS provisions under Section 194-I of the Act will be applicable on the net rental amount payable which is exclusive of the service tax levied. [ix] The High Court of Rajasthan has adopted a similar view in the case of Commissioner of Income-Tax v. Rajasthan Urban Infrastructure.[x]
The CBDT circular dated January 1st, 2014 clarified as follows;
“3. The Service tax paid by the tenant doesn’t partake the nature of the “income” of the landlord. The landlord only acts as a collecting agency for Government for collection of service tax. Therefore it has been decided that tax deduction at source (TDS) under Sections 194-I of Income-tax Act would be required to be made on the amount of rent paid/payable without including the service tax.”[xi]
While the circular dealt with the issue of TDS under Section 194-I, its rationale can be used to infer that the seller or the e-commerce participant only act as agents for the Government for the collection of GST. Therefore, the TDS provision under Section194-O would be applicable to the sales consideration excluding the GST amount.
Further, it is important to note that the deduction of tax under Section 194-O will be in addition to the tax being collected under the Central and Goods and Services Act, 2017 which levies a tax on the goods and services being supplied through e-commerce platforms. [xii] Therefore, the additional 1% under Section 194-O would result in the generation of an acute cash-flow crunch for e-commerce participants.
Moreover, the participants of such an e-commerce transaction are required to be mandatorily registered under the Central Goods and Services Act to claim Tax Collection Credit.[xiii] This mandatory registration would inherently achieve the proposed purpose of reporting the transactions which wouldn’t have normally been reported.
The Conundrum of Direct Payment
The explanation under Section 194-O envisages a situation where the sales consideration for the product or service purchased is not channeled or transmitted through the e-commerce platform or operator. The sales consideration would directly be transferred to the seller or the e-commerce participant. In this case, the e-commerce operator would not have control over the funds and consequently wouldn’t be able to carry out the withholding obligation. However, the explanation provided creates a ‘deeming fiction’ and holds the e-commerce operator to mandatorily responsible to withhold tax on such a transaction.[xiv]
As per the ‘deeming fiction’, the direct payment “shall be deemed to be the amount credited or paid by the e-commerce operator to the e-commerce participant.” Therefore the e-commerce operators are obligated to withhold the tax irrespective of the fact that the sales consideration is routed through them or not.
Inconsistency with the RBI Guidelines on Regulation of Payment Aggregators and Payment Gateways
Most e-commerce operators had the alternative of integrating the sales consideration aggregation, a business model where the money is routed through them to the sellers instead of a business model that follows the cash-on-delivery model. However, after the introduction of the “Guidelines on Regulation of Payment Aggregators and Payment Gateways” dated 17th of March, 2020 by the Reserve Bank of India (“RBI”), the e-commerce operators wouldn’t have that choice anymore.[xv]
The issued guidelines restrict the e-commerce operator from undertaking such online payments without obtaining a license.[xvi] Further, to comply with the guidelines and acquire the license, most e-commerce operators would have to separate the online payment facility from the business conducted on the e-commerce platform. Accordingly, the e-commerce operator must essentially create an entirely new entity only for the sake of receiving the sales consideration.
Furthermore, even after obtaining the license and complying with the other obligations, the sales consideration collected from the purchaser is mandated to be set aside in an escrow account by the e-commerce operator and then paid to the e-commerce participant in its entirety. No amount can be debited from the escrow account and in extension TDS cannot be withheld as it isn’t permitted under the guidelines. Therefore, there is a conflict between the guidelines issued by RBI and Section 194-O concerning the obligation of the e-commerce operator to withhold tax. Section 194-O hasn’t been harmonized or made consistent with the requirements of the guidelines. This inconsistency must be rectified immediately.
The Way Forward
It is necessary for the e-commerce operators to thoroughly comprehend the Goods and Services Taxation system and the provisions of the Income-Tax Act to revise their business models as per the new provisions. However, the Government needs to provide reasonable clarifications and help ease the understanding of the intent behind the introduction of the provision.
Firstly, non-resident e-commerce participants do not come under the scope of this provision, therefore any payments made to them by the e-commerce operators are not taxed under this provision and this defeats the purpose sought to be achieved by it. Secondly, the CBDT should also clarify whether the TDS should be deducted on the amount including the GST collected on the transaction or not. Although TDS from tax is generally avoided, a specific clarification stating that the TDS under Section 194-O would be applicable to the sales consideration excluding the GST amount would prevent excessive taxation on the e-commerce operators. Thirdly, the deeming fiction provision which places the onus of withholding tax on the e-commerce operator even when the money isn’t routed through them is highly discriminatory against the e-commerce operator and some clarifications or changes should be brought forward to ensure this unnecessary burden isn’t placed on the e-commerce operators.
Lastly, the provision completely contradicts the RBI’s “Guidelines on Regulation of Payment Aggregators and Payment Gateway.” E-commerce operators cannot be mandated to withhold tax on sales consideration received because of a taxation mechanism and at the same time refrain from collecting such sales consideration altogether because of a regulatory mechanism. These contradictory policies would result in unnecessary convolutions during the time implementation or compliance.
If the Government ensures the unambiguity in the provision, it can reach its objective to ‘widen and deepen’ the tax net. However, even though Section 194-O would pave the way for digital taxation in India, the inconsistencies and the lack of conceptual clarity of the provision would result in a multitude of enforcement and compliance failures. It is the belief of the author, that unless the irregularities and inconsistencies are corrected, Section 194-O of the Income-Tax is certainly not indispensible.
[i] Report on Taxation of Digital Businesses: Press Information Bureau, Ministry of Finance, Government of India (2019).
[ii] Finance Act § 52 (2020).
[iii] Income-tax Act § 194-O (1961)
[iv]Explanatory Memorandum, Finance Bill, 2020 https://www.incometaxindia.gov.in/budgets%20and%20bills/2020/memo.pdf (July 2nd, 2020)
[vi] Radhakishan Rawal, Analysis of the Finance Act, 2020 and More (Direct Tax) (Bloomsbury 3rd Edition, 2020
[vii] Central Goods and Services Tax Act § 52 (2017).
[viii] Circular F. No. 275/73/2007-IT (B), dated June 30, 2008, issued by the Central Board of Direct Taxes
[ix] Circular No. 4, dated April 28, 2008, issued by the Central Board of Direct Taxes.
[x] CIT v. Rajasthan Urban Infrastructure,  359 ITR 385 (Raj).
[xi] Circular No 1, dated January 1, 2014, issued by the Central Board of Direct Taxes.
[xii] Central Goods and Services Tax Act § 52 (2017).
[xiii] Central Goods and Services Tax Act § 24 (2017).
[xiv] Income-tax Act § 194-O cl. 1 (1961).
[xv] Circular No. DPSS.CO.PD.No.1810/02.14.008/2019-20 dated March 17, 2020 on “Guidelines on Regulation of Payment Aggregators and Payment Gateway” issued by the Reserve Bank of India.
[xvi] Circular No. DPSS.CO.PD.No.1102 /02.14.08/ 2009-10 dated November 24, 2009 on “Directions for opening and operation of Accounts and settlement of payments for electronic payment transactions involving intermediaries” issued by the Reserve Bank of India.