Withholding Tax (WHT) on e-commerce transactions has been proposed to be introduced by Budget 2020 via insertion of a new section-Section 194-O in the Income Tax Act, 1961. It refers to the tax withheld by a payer of income while making payments to the payee of income. Such tax withheld is available as credit to the payee while filing his tax return.
In terms of Section 194-O, e-commerce platform operators will withhold 1 per cent tax, while making payments to its vendors on the amounts paid by the end-customers to e-commerce platforms towards sale of goods/ services. Such withholding of tax is, however, subject to the conditions prescribed in the section.
However, the e-commerce entities, including Amazon and Walmart-owned homegrown etailer Flipkart, have said they need time to upgrade IT systems in order to enable them to collect the 1 per cent tax deduction at source (TDS) from sellers.
"Introduction of levy of withholding tax by e-commerce operators (such as Flipkart, Amazon, Myntra, etc.) is in line with the government's initiative of widening its tax base. While e-tailers have agreed to the WHT levy, their existing infrastructure/systems and related internal control or procedures need to be overhauled completely to incorporate such a major shift," said Neeraj Sharma-Senior Executive Director-Direct Tax and Regulatory-Nexdigm (SKP Business Consulting LLP).
Sharma also said that the changes may be on account of:
- Introduction of levy of 1 per cent WHT on payments made to vendors;
- WHT on the amount paid by end-customer to e-commerce company;
- No WHT in case of vendors, where the gross sale is not exceeding Rs 5 Lakh and vendor furnishes its PAN;
- Higher WHT of 5 per cent, in case PAN is not furnished by the vendor;
- No WHT in case of payment for advertisement services.
"Considering the above scenario and the government's stance in the past, one may expect, such amendment to be effective from June 2020, in place of the existing timeline of 01 April 2020," said Sharma.
"While government's move settles the dispute in case of e-commerce service providers (such as Uber/ Ola), which had been a subject of tussle between revenue authorities and e-commerce operators, it also creates a disparity between e-tailers and brick & mortar retailers, where the sale of goods is not subject to WHT," Sharma explained.
But what would be the impact of WHT on consumers-will the goods on e-commerce platforms become expensive?
"Charge of WHT on e-commerce transactions shouldn't impact consumers as it is not a levy on sale price of the goods or services (like GST), rather a levy on the income of the vendors selling goods or services on e-commerce platforms. E-commerce vendors may face certain cash flow issues," said Sharma, adding, "Impact, if any, may be on account of an increase in working capital costs, if such costs are also passed on to the consumers."
So, there will be no direct impact of imposition of the Withholding Tax itself, unless e-commerce platforms and vendors decide to pass on their burden to the consumers.