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Budget 2021: Tax Breather On E-commerce Essential For MSMEs To Adapt To Digital World
2020 was a tough year for Indian economy as Coronavirus led lockdown stalled the economy and the one segment which has suffered severely is that of MSMEs. What has made it even more tougher for MSMEs is the taxation burden imposed by the government.
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While COVID-19 has made it imperative for MSMEs to adapt to the digital world to survive and thrive due to its various benefits, Section 194-O and Section 206-C (1H) announced in Union Budget 2020 makes the job tougher for them to take advantage of the digital world. These latest taxes are an additional burden over the already existing responsibility of deducting TCS under GST.
As per a survey of 2700 MSMEs conducted by India SME Forum, while a whopping 89 percent of respondents have leveraged the online platforms to support their businesses and maintain viability, 93 percent respondents said implementation of 194-O tax rule is touted as the biggest constraint impacting MSME players, as they also struggle with supply chain disruption, lowering demand and unavailability of labour. The key impact that MSME players of the implementation of 194-O tax rule includes increase in the regulatory burden and blocking of their working capital, which would deter them from using online channels.
As per calculations, for merchants with turnover of upto Rs 1.25 crore, TDS under section 194-O would exceed the tax on income, resulting in a refund position, hence creating potential working capital constraints for small businesses and thereby gravely impacting smallest of the businesses which already operate on wafer-thin margins.
Therefore, it becomes essential that MSMEs be given a breather from the same in form of partial or complete waiver or postponement till at least next year till the time economy comes back to normalcy.
One reasoning which supports this tax is that it will help the government keep a leach over tax evasion by gaining access to seller database. But that objective is already being fulfilled by TCS under the GST law, which is being deducted and deposited by ecommerce platforms at the rate of 1 percent of net sales consideration. Also, with CBDT and CBIC already signing an MoU for data sharing, multiple taxes for the same end purpose would seem to nullify the synergies arising from the pact. And this tax becoming effective now, at this time may not be the best as MSMEs have already been affected by COVID-19 stress.
Moreover, if the purpose of introducing section 194-O was to track transactions that are taking place through a marketplace, that objective of tracking transactions would be met even where the rate of TDS is reduced from 1 percent to 0.1 percent. This tax defeats the purpose of capturing the tax evasion as it will end up getting a grip over a small fraction of the overall pie. Online retail as a percentage of overall retail in India is roughly 3 percent, add to that exemption for online sellers with gross merchandise sale of less than Rs 5 lakh in the previous year. So the benefit of capturing this small fraction of taxpayers outweighs the burden it will impose on MSMEs. If the objective is to deal with tax evasion, it would be better to a better grip over the audit trails than to levy TDS. Also, this is contrary to the various relaxations given by the government to MSMEs to ride over the virus affect.
Another issue here is the low exemption threshold under section 194-O (3) for individuals/ HUFs. As per calculation, the turnover required to be achieved for income to exceed the basic exemption limit of Rs 2.5 lakhs would be Rs 31.25 lakhs considering the 8 percent presumptive rate under section 44AD, which shows that the Rs 5 lakh exemption limit provided under section 194-O is extremely low.
What makes this tax a regressive move is the tax on tax, since it is levied on the gross amount of sales or services or both. This includes GST and no returns or discounts are required as per the clarification given in the CBDT circular dated 29th September which says since the collection is made with reference to receipt of amount of sale consideration, no adjustment is required. It would be beneficial for MSMEs in terms of easing their working capital needs if TDS is on amount of sale of goods net of sales returns and other items as mentioned above.
Lastly, Finance Act, 2020 also inserted sub-section (1 H) in section 206C of the Act which mandates that with effect from 1st October, 2020 a seller receiving an amount as consideration for sale of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year to collect tax from the buyer a sum equal to 0.1 per cent of the sale consideration exceeding fifty lakh rupees as income-tax. The collection is required to be made at the time of receipt of amount of sales consideration. Where the buyer does not furnish his Permanent Account Number (PAN) or Aadhaar number to the seller, then the tax shall be collected by the seller at the rate of 1 percent. Government’s objectives are the same here, check for tax evasion and add another source of tax collection. This would mean three tax instances for one product, TCS under Section 206-C of IT Act, one instance of TCS under GST, and one instance of TDS under Section 194-O of IT Act.
To sum it up, there is a need to waive off or postpone these taxes and consider providing an easy less onerous taxation regime for the ecommerce sector and MSMEs in order for the same to flourish in order to fuel the economy.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.