The government is considering providing relief to micro, small and medium enterprises (MSMEs) hit by the coronavirus pandemic, sparing them from a 1% tax on gross sales through e-commerce platforms, which takes effect on October 1, officials said.
The tax exemption limit could be increased from the existing Rs 5 lakh for small businesses. The tax deducted at source (TDS) mechanism would continue to check tax evasion by entities using e-commerce platforms to sell goods and services, two officials working in different ministries said, requesting anonymity.
“The provision has been introduced in the Budget 2020-21 to make e-commerce transactions tax-compliant. Hence it has a clause related to PAN [permanent account number] or Aadhaar number,” one of the officials said.
Finance minister Nirmala Sitharaman, in her budget speech on February 1, 2020 introduced a TDS mechanism for e-commerce transactions. “In order to widen and deepen the tax net, it is proposed to provide that e-commerce operators shall deduct TDS on all payments or credits to e-commerce participants at the rate of 1% in PAN/Aadhaar cases and 5% in non-PAN/Aadhaar cases,” she said.
“In order to provide relief to small businessmen, it is proposed to provide exemption to an individual and HUF [Hindu Undivided Family] who receives less than Rs 5 lakh and furnishes PAN/Aadhaar,” Sitharaman said. The budget provision is effective from October 1.
The industry, particularly MSMEs, have submitted to the government that the TDS mechanism would be an additional burden on them as TDS will be deducted on gross sales amount that also include the commission to the e-commerce platform, the second official said.
“Besides, it will be tax on tax as the gross sale value would also include Goods and Services Tax (GST). Thus, their already wafer-thin profit margin would shrink further and they will be dissuaded to transact online,” he said.
Besides raising the current limit of Rs 5 lakh, other relief under consideration for small units include extending the October 1 deadline, and computation of TDS after deducting GST and commission to the e-commerce platform instead of gross sales value, the officials said.
Vinod Kumar, president of the India SME Forum, said: “E-commerce platforms are emerging marketplaces for MSMEs. They provide another alternative to small units to sell their produce to a wider customer base. It should be encouraged. Therefore, the government may revisit the TDS policy.”
Experts say that e-commerce platforms have the potential to revive MSMEs that contribute about 30% of country’s gross domestic product (GDP). Nilaya Varma, co-founder and CEO of consulting firm Primus Partners, said: “Even amidst the Covid-19 crisis, MSME segment is driving the hopes of the nation to bring it back on the path to recovery. Given financial strain and the already thin margins that the MSME segment works on, further exacerbated bythe pandemic, it is ideal for the government to defer any measures which can strain cash flows for such players, for at least a year,” Varma said.
Divakar Vijayasarathy, founder and managing partner of consulting firm DVS Advisors LLP said the Rs 5 lakh limit is very low even for micro entities.
“The said provision would impact the small players dealing with products with lower margins such as FMCG [fast moving consumer goods] suppliers where the gross margins are 10% or lower, since it is on the gross sale value including GST. Both their working capital as well as the cash profit would be impacted,” he said.
“The impact would be inversely proportional to the margins i.e. lower the margins, higher would be the impact. The limits should be increased substantially to give relief to the small traders,” he added.
Ther MSME sector contributes 37% of manufacturing output in India and provides employment to more than 111 million people; it also accounts for about 50% of India’s goods exports.