Section 194-O & 206-C Disrupting Online and digital business eco-system

Union Budget 2020 introduced two sections with the noble intent of widening the taxpayer base. Sec194-O levied [email protected]% on all e-Commerce transactions, 206C(1(h)) mandated TCS of 0.1% for sales exceeding INR50lakhs and Sec206C(1G)(b) mandated collection of [email protected]% with PAN and 10% without PAN from the buyer of an overseas travel package from any online eCommerce entity.

Both these direct tax provisions which were deferred, now come into effect from Oct1st, and sincerely act as major deterrents to ease of doing business and block critical working capital which may have never been the intent of the Government.

The 1% TDS u/s194O is applicable on sale of goods and services through any e-commerce entity. This clearly seems to ignore the complexities of online businesses and becomes a huge compliance burden for all sectors that are online. COVID-19 saw many businesses, MSMEs, traders, plumbers, electricians, salons go online and these would get covered by the same.

Added to compliance issues are ease of doing business challenges arising from the conflicts with existing sectoral regulations. When a customer purchases an insurance policy through an online intermediary neither RBI nor IRDAI regulations permit insurance intermediaries to deduct any amount from the premium collected from customers. Likewise in online travel business that involves air ticketing, agreed payment settlement procedures by IATA do not allow deduction of TDS thereby creating a situation of conflict with existing laws.

194O also inadvertently targets the same transactions already covered under GST laws requiring TCS for online participants selling goods. Multiple layers of taxation lead to increased compliances, block working capital, hurt the entire supply chain including start-ups.

Sec206C(1G)(b) inconveniences all tax filers and salaried taxpayers to further get tax deducted if they book any overseas package online. This section in fact encourages Indian customers to completely shift from online India based operators to foreign ones since these regulations do not apply to them.

In summary all the above provisions can become an administrative nightmare for the department as it will result in low tax collections, increased refunds as a majority will have no tax liability. These provisions seem to overlook business rationale and mandates e-Commerce entities to pay TDS on transactions that they are not even collecting. There is an emergent need to withdraw Sec194O and 206C as they go counter to digital India and have a damaging effect on livelihoods, businesses and existing regulations.

(Views expressed here are author’s personal)

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