New provisions on withholding tax and tax collection at source in India

India’s Central Board of Direct Taxes has issued Circular 17/2020 dated September 29, 2020 (effective October 1, 2020) (the “CBDT Circular”), providing important clarifications in respect of withholding tax on e-commerce transactions and tax collection at source on the sale of goods under the Income-tax Act, 1961 (the “IT Act”).

Background

To widen the tax net, the Finance Act, 2020, introduced certain changes to the tax withholding and tax collection provisions in the IT Act, as follows: You can find our update on Union Budget 2020-2021, where some of these changes were announced here.

1. A tax withholding obligation of 1% was imposed on amounts received by resident e-commerce sellers on the sale of goods or services facilitated by an e-commerce operator through its digital or electronic facility.
2. A tax collection at source obligation of 0.1% (0.075% until March 31, 2021) was imposed on the number of goods sold by any seller (whose turnover exceeds INR100 million in the immediately preceding financial year (other than exports)) on receipt of the sale consideration from the buyer (if the sale consideration is in excess of INR5 million). If the buyer does not have a permanent account number or an Aadhaar number, then tax will be required to be collected at the higher rate of 1% on the gross sale consideration.
3. A tax collection at a source of 5% was imposed on authorised dealer banks receiving an amount or an aggregate of amounts of INR700,000 or more in a financial year for remittance outside India under the Liberalised Remittance Scheme of the Reserve Bank of India.
4. A tax collection at a source of 5% was imposed on a seller of an overseas tour package.

CBDT Circular

The CBDT Circular has, among others, excluded from the tax deduction and tax collection at source provisions the following transactions:

1. Transactions in securities and commodities traded through a recognized stock exchange or cleared and settled by a recognized clearing corporation, including recognized stock exchanges or clearing corporations located in the International Financial Services Centre.
2. Transactions in electricity, renewable energy certificates and energy saving certificates that are traded through power exchanges.
3. Payment gateways, if an e-commerce operator that facilitates the sale of goods or services has already withheld taxes. To facilitate this and to avoid double taxation, payment gateways have been advised to seek an undertaking from the e-commerce operator in this regard.
4. Where insurance agents or aggregators are not involved in a transaction between the insurance company and the buyer of the insurance policy after the first year, such insurance agents or aggregators will not have to apply tax deduction provisions in subsequent years.
5. Sale of fuel to non-resident airlines at airports in India.

For computing, the de minimus exemption of INR0.5 million in the case of tax withholding on e-commerce transactions and INR5 million in the case of the collection of tax on the sale of goods for the financial year 2020-21, the amounts paid, credited or received prior to October 1, 2020 will have to be included.

Our Comments

Considering the broad scope and ambiguous language of the tax deduction at source provisions in the IT Act, clarifications on the issues mentioned above are welcome.  However, it will be cumbersome to comply with these provisions, and sellers and service providers will have to modify their systems.  This is not in consonance with the ease of doing business narrative of the Indian government.  Separately, the issues listed below continue to remain open.

• Whether the scope of “gross amount of sale or service invoice” should include discounts, commissions, freight charges, customs duty, and GST?
• What if the buyer returns the goods (due to certain defects) and/or does not make payment for the goods? Also, how would the advance and other receipts that are not part of sales consideration be accounted for?
• What if a payment is received after October 1, 2020, even though the invoice has been issued before October 1, 2020?
• Can this provision trigger a “significant economic presence” for a foreign company in India under the IT Act and will the provisions of a tax treaty prevail?

We hope that the CBDT clarifies the foregoing points in the days to come.  Finally, considering the Coivd-19 pandemic, it would have been better if these provisions were made effective from April 1, 2021.