E-commerce transactions are subject to various tax regulations under both Income Tax and GST. To prevent tax evasion and ensure proper tax compliance, the government has introduced new sections in both Direct and Indirect Tax laws.
Earlier, in the absence of specific rules for e-commerce, small sellers on e-commerce platforms could easily avoid paying taxes on their income from sales and services. Likewise, Non-Resident E-Commerce Operators earned profits in India without contributing to the country’s tax revenue. To address these gaps, the government implemented targeted provisions under Income Tax and GST laws.
Provisions under the Income Tax Act: Taxation on E-Commerce Transactions
Section 194-O, introduced by the Finance Act, 2020, mandates that e-commerce operators deduct TDS at the rate of 1% on the gross amount of sales or services. This deduction is required either at the time of crediting the sale amount to the participant’s account or when the payment is made to the participant—whichever occurs earlier.
However, the term “gross amount of sales” lacks a clear definition. For instance, consider this example:
- Total sales: ₹30 lakhs
- Returns: ₹5 lakhs
In this case, TDS is to be deducted at 1% on ₹30 lakhs (the total sales amount), not ₹25 lakhs (sales after returns).
This clarification ensures that tax is deducted on the total transaction value rather than the adjusted value after returns.
By implementing such measures, the government aims to streamline tax collection and create a level playing field for all participants in the e-commerce ecosystem.
E-commerce transactions are governed by various tax provisions under Income Tax and GST to ensure compliance and prevent tax evasion. The government has implemented specific rules in both Direct and Indirect Tax systems to address challenges posed by the digital economy.
Key Provisions under the Income Tax Act
Section 194-O: Taxation on E-Commerce Transactions
This section, introduced by the Finance Act, 2020, requires e-commerce operators to deduct TDS at 1% on the gross amount of sales or services. The deduction is applicable at the time of crediting the participant’s account or making the payment—whichever comes first.
Important Considerations:
- Gross Sales Definition: If total sales amount to ₹30 lakhs and returns are ₹5 lakhs, TDS is deducted on ₹30 lakhs (gross sales) and not on ₹25 lakhs (net sales).
Key Terms:
- E-Commerce Operator: The individual or entity managing a digital platform for online business, whether resident or non-resident.
- E-Commerce Participant: Any person selling goods or providing services (including digital products) through an online platform in India. Non-resident participants are exempt from TDS provisions.
Special Rules under Section 194-O:
- Direct Payments by Buyers: Even if a buyer pays an e-commerce participant directly, it is considered as payment made by the operator for TDS purposes.
- TDS Exemption: Participants earning up to ₹5 lakhs in a financial year are exempt from TDS, provided they are individuals or HUFs, and the earnings are not from hosting advertisements.
Equalization Levy
Section 165 (Finance Act, 2016):
- Applicable for payments exceeding ₹1 lakh per year made for digital advertising by:
- A resident business or profession, or
- A non-resident with a permanent establishment in India.
- Rate: 6% of the payment amount for online advertising.
Section 165A (Finance Act, 2020):
- Applicable for revenue earned by e-commerce operators from:
- Indian residents.
- Non-residents meeting specific conditions.
- Users accessing the platform via Indian IP addresses.
- Threshold: Annual turnover exceeding ₹2 crores.
- Rate: 2% of the revenue.
Taxation under GST
Section 52 (CGST Act, 2017):
- E-commerce operators must collect TCS (Tax Collected at Source) not exceeding 1% on the net taxable supplies made through their platform.
- Net Taxable Supplies: Total taxable supplies minus returns.
Important Points:
- Rates:
- Intra-State: 0.5% CGST + 0.5% SGST.
- Inter-State: 1% IGST.
- Deadlines:
- Payment of TCS: Within 10 days of the following month.
- Monthly Statement: File within 10 days.
- Annual Statement: File by 31st December of the next financial year.
- Credit and Matching:
- Suppliers can claim TCS in their electronic cash ledger.
- Outward supplies reported by operators are matched with suppliers’ returns.
Section 9(5) of the CGST Act, 2017:
E-commerce operators are liable to pay tax in specific cases:
- Passenger Transport Services: 100% tax liability lies with the operator.
- Accommodation Services: If providers are unregistered, operators are liable.
- Housekeeping and Similar Services: Operators pay tax only if service providers are unregistered.
Contradiction Between Income Tax and GST
E-commerce operators face dual compliance under Section 194-O of the Income Tax Act (TDS) and Section 52 of the CGST Act (TCS) for the same transaction, creating overlapping obligations.
Practical Examples
Example 1 – Taxation on Gross and Net Sales:
- Gross Sales: ₹25 lakhs.
- Returns: ₹5 lakhs.
- TDS Deduction: ₹25,000 (1% on ₹25 lakhs).
- TCS Collection: ₹20,000 (1% on ₹20 lakhs after returns).
If the operator charges a 5% commission (₹1,00,000) with 18% GST, the total commission is ₹1,18,000. Participants can claim TDS and TCS credits in their returns.
Example 2 – Non-Resident E-Commerce Operator:
- Sales through Beta Inc: ₹10 crores.
- TDS: ₹10 lakhs (1% under Section 194-O).
- Equalization Levy: ₹20 lakhs (2% under Section 165A).
Example 3 – Advertisement Services:
For advertisement services instead of product sales:
- TDS: ₹10 lakhs (1% under Section 194-O).
- Equalization Levy: ₹60 lakhs (6% under Section 165).
These rules and provisions collectively aim to streamline tax compliance for e-commerce transactions while ensuring a fair contribution to the tax system.
