Analysis, Income Tax, Law & Society

iAnalyze: Section 194-O

Welcome to our new column – iAnalyze, In this column, we get notable practitioners and corporate tax professionals to share their view on tax developments.

In this edition, we have CA Avnish Arora, along with inputs from Dhaval Jariwala, shares his views on a section recently introduced in the Income Tax act.

The Rationale

There has been a constant effort on the part of the Government to enhance the scope of withholding tax provisions either by amending the provisions enshrined in Chapter XVII-B of the Income-tax Act, 1961 (Act) or by introducing new withholding tax provisions from time to time.

It is believed that withholding tax provisions or TDS (tax deducted at source) provisions help in earlier collection of tax and consequently in bridging the gap in tax collection due to tax evasion. Also, since the responsibility of TDS has been cast on the taxpayer, it is believed that the cost of collection of tax is also reduced.

In India it is estimated TDS account for approx 43% of direct tax revenue.[1] Also, ‘withholding taxes’ are easier to collect as opposed to a system where assessees self-declare their income. So it can be deduced that this provision was introduced to widen the tax base and increase collection of taxes.

Any Challenges/Gaps?

An e-commerce operator in India  who is already complying with various Income Tax provisions may be able to manage the additional compliance burden of complying with the provisions of section 194-O. However, the challenge arises on whether the provision would apply to a non-resident e-commerce operator.

Is the non-resident e-commerce operator liable to withhold tax with respect to payments made to its participants?

Let’s say, an Indian seller, sells its products on the website of a non-resident e-commerce operator. Is the non-resident e-commerce operator liable to withhold tax with respect to payments made to its participants?

The legislation defines e-commerce participants as residents in India, the definition of e-commerce operators does not mention whether they should be resident in India or not.

Deductions (The Sherlock Holmes Kind)

  • Upon a reading of Section 194-O r/w Section 1 of the Income-tax Act, could it mean that the Act extending to the whole of India be applicable to a non-resident e-commerce operator?
  • There is an amendment brought in on Section 204 of the Income-tax Act which defines persons responsible for making the payments. With the insertion of clause (v) to Section 204, it seems that non-resident operators are also liable to withhold tax.

Who will bell the cat?

The next challenge that would arise is if non resident operators are liable to withhold tax, how would they comply. Certain practical challenges would arise such as making of a PAN/TAN and how would they do it with no physical presence in India. If a non resident e-commerce operator does not withhold tax, then as per the law whether the provisions of Section 163 will come into play and  whether an e-commerce participant can be held as a statutory agent? The question also arises if non withholding of TDS be recovered from e-commerce participants under Section 201?  Also how will the mechanism of Section 194-O operate where the payment is received by the ecommerce participants directly?

Conclusion

In conclusion, for an Indian e-commerce operator, the provision wouldn’t cause major hurdles in terms of compliance, except for some technical interpretation issues that can be ironed out over time. The main issue still persists on the compliance by non-resident e-commerce operators. The question on non-resident e-commerce operators still remains unanswered by the provision.

About the author

Avnish is an FCA from ICAI, and a senior tax professional with over 18 years of experience in International Tax, Domestic Tax, Litigation, and Compliance. He has advised various companies on a variety of complex international and domestic tax issues and represented corporates at appellate authorities. He is a well known thought leader with many articles to his name and has also spoken at many conferences in India and abroad.


[1] As per CBDT taxalogue Oct-Dec 2019

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