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Introduction
From mid-2025 onward, India’s tax authorities
have issued fresh clarifications around accounting and tax obligations specific
to e-commerce companies (both B2B and B2C). These changes affect how online
marketplaces, direct sellers, and third-party vendors must record revenue,
deduct TDS, and apply GST. India’s move signals a push to bring digital
commerce into a more transparent tax net. For e-commerce players across India,
this means revising internal accounting policies, tightening compliance, and
rethinking margins in light of new obligations.
Background / Context
Online commerce has grown explosively in India
over the past decade. With that growth have come regulatory and tax challenges
— how to track cross-border digital sales, ensure proper GST collection, and
prevent tax base erosion by foreign entities.
Key regulatory developments
·
India’s Equalisation
Levy was expanded in 2020 to cover non-resident e-commerce operators
(2% on consideration) in addition to its original digital advertising scope.
·
However, in August 2024, the government
abolished the 2% levy on e-commerce supplies from non-residents.
·
Concurrently, India is implementing GST 2.0 from 22 September 2025, with
simplified rates and enhanced digital monitoring.
·
On the domestic front, Section 194O of the Income Tax Act imposes a 1% TDS by
e-commerce operators on payments to sellers above certain thresholds.
These reforms are crucial because e-commerce
firms straddle traditional trading, service delivery, and digital platform
operations. Many accounting systems were never designed for such hybrid models.
The need to adapt is now pressing.
Historically, many e-commerce transactions
escaped rigorous oversight due to boundary issues — e.g. platform fees,
commissions, cross-border flows, return flows. The tax authority’s tightening
reflects a global trend of bringing digital commerce within the formal tax
ambit.
Detailed Explanation of the Changes
Here is what the authorities have specified,
challenged, or clarified in recent months — particularly relevant for
accounting teams, tax advisors, and online sellers.
TDS under Section 194O
E-commerce operators (platforms) are required
to deduct 1% TDS on gross
amounts credited to sellers (or paid), when annual sales cross ₹5 lakh.
·
The threshold applies per seller (resident
individual or HUF).
·
If PAN/Aadhaar is not provided, higher TDS (5%)
may apply under Section 206AA.
·
It is gross amount (before returns/discounts),
not net, that is subject to TDS.
From an accounting standpoint, this means
platforms must treat TDS as a liability at the time of credit/payment and
furnish proper statements to sellers for claiming credit.
GST & Tax Collection at Source (TCS) by
E-Commerce Operators
Under the GST regime, e-commerce operators are
often classified as “operators of
electronic commerce” and have special obligations:
·
They must collect TCS (Tax Collection at Source) from the net value of
taxable supplies made through them (typically up to 1%).
·
They should maintain detailed transaction
records (supplier-wise, seller-wise, commission amounts).
·
They need to properly segregate commission/fee revenue (for the
platform) versus supplies by third-party sellers.
Equalisation Levy Abolition
With the abolition of the 2% equalisation levy
on e-commerce in August 2024, some cross-border compliance burdens have eased
for non-resident sellers.
Nevertheless, other digital tax regimes — particularly the 6% levy on ad
revenue (still under review) — and rules around significant economic presence (SEP) remain relevant.
GST 2.0 — Implications for E-Commerce
Implementation of the GST 2.0 regime brings:
·
A simplified slab structure (0%, 5%, 18%, 40%)
and elimination of intermediate rates.
·
Enhanced digital compliance and real-time monitoring
of invoices and reporting.
·
Pressure on margins, especially for consumer
goods (B2C), due to rate changes.
In sum, e-commerce firms must revisit
accounting policies for recognition of revenue, classification of platform
income vs. trading income, tax credit treatment, and withholding / collection
obligations.
Impact Analysis
These changes will ripple across the ecosystem
— with winners, losers, and challenges to internal operations.
Who Gains / Loses
·
Small sellers
may face a compliance burden, but also gain clarity on TDS and input credit
claims.
·
Large
marketplaces may benefit from clearer rules and reduced uncertainty,
but will bear the cost of system upgrades and compliance overheads.
·
Foreign
e-commerce players benefit from the levy's removal, but must still
watch for digital PE / SEP risks.
·
Tax
authorities are better equipped to enforce collection and reduce
revenue leakage in the fast-growing e-commerce sector.
Practical Implications
Businesses / Sellers (B2B & B2C)
·
Must revisit accounting policies: revenue recognition,
returns/discount accounting, commission income.
·
Need to maintain cash flow buffer to pay TDS and TCS liabilities timely.
·
Coordination between marketplace and sellers is
crucial — statements, reconciliation, and audit trails must be robust.
·
Re-evaluate pricing strategy: cost absorption of TDS, TCS, and
altered GST implications may require margin adjustments.
Auditors / Chartered Accountants
·
Must review whether clients’ accounting systems
can handle multi-tier flows (platform → seller → customer).
·
Verify TDS / TCS compliance, correct remittance,
and adequate disclosures.
·
Scrutinize input tax credit (ITC) claims,
ensuring proper eligibility, especially when goods/services cross state lines.
·
Assess transfer
pricing and digital PE / SEP
risks for foreign e-commerce firms operating in India.
Taxpayers / End Users
·
Although primarily B2B/B2C sellers are affected,
in some cases cost pressures may be passed to consumers.
·
Greater transparency may reduce hidden fees or
surprises in billing.
Common Misunderstandings (and Errors)
·
Thinking TDS under 194O is on net sales (after returns). It is on gross.
·
Assuming equalisation levy is fully gone for all
e-commerce. Only the 2% levy on non-resident e-commerce was removed; other
digital rules still persist.
·
Confusing platform
commission income with product sales income — they must be separately
tracked.
·
Believing GST TCS and TDS under 194O can be netted
off — they are distinct obligations.
·
Assuming foreign sellers without a physical
presence are exempt — SEP / digital PE rules may still create exposure.
Expert Commentary
Having observed similar shifts in global digital
tax landscapes— notably in OECD countries and the EU — I see India’s move as
inevitable. A rigid carryover of traditional accounting norms cannot handle
multi-party digital platforms. The authorities are sending a message: business models must adapt.
From my vantage point, mid-size marketplaces
will be the most challenged; they must invest heavily in compliance
infrastructure just when competition is intensifying. Yet, firms that adapt
nimbly could gain a competitive moat by offering seamless compliance to their
seller partners.
Conclusion & Action Steps
India’s updated accounting and tax regime for
e-commerce signals a transformational shift — from ambiguity to enforcement,
from informality to digital rigor. For B2B and B2C players alike, adapting is
not optional.
Action
steps to consider now:
1.
Audit your current accounting policies for e-commerce
flows and identify gaps.
2.
Upgrade systems to capture TDS, TCS, commission splits,
and reporting demands.
3.
Train your finance/tax team in the new regime — ensure
timely remittance and disclosures.
4.
Engage tax advisors to assess SEP / digital PE exposure
(especially for foreign sellers).
5.
Monitor regulatory updates, especially under GST 2.0
and potential further digital tax changes.
What felt novel a few years ago is now
mainstream regulation. E-commerce firms that stay proactive will not just
survive — they may gain an edge through compliance trust.
FAQs
Q1: Does
the 1% TDS under Section 194O apply to foreign sellers?
A1: No. Section 194O applies to e-commerce participants who are residents
(individuals or HUF) in India. Foreign sellers (non-residents) are generally
out of scope for this.
Q2:
After removal of the 2% equalisation levy, do foreign e-commerce operators face
any digital tax in India?
A2: The 2% levy on e-commerce supplies was removed, but other digital tax
regimes (e.g. ad levy, SEP / digital PE rules) may still apply depending on
transaction nature.
Q3: Can
a seller offset TDS deducted under 194O against income tax liability?
A3: Yes. The TDS certificate provided must be used by the seller to claim
credit in their income tax returns, reducing tax liability.
Q4: How
does the platform record the TDS / TCS in its books?
A4: The platform must show TDS / TCS as a liability when the underlying
transaction occurs, then reduce it upon remittance. Also, platform commission
income must be separately recorded from seller sales flows.
Q5:
Will these changes affect small e-commerce sellers below the ₹5 lakh threshold?
A5: If a seller’s gross sales via the platform do not exceed ₹5 lakh in a year,
the 1% TDS under 194O need not be deducted (subject to compliance with PAN/Aadhaar).
However, GST / TCS obligations may still apply based on nature and turnover.
References
/ Source Links
·
PwC on equalisation levy & scope
·
EbizFiling on Section 194O details
·
InternationalTaxReview on 2% levy removal
·
Trustiics: digital tax and GST rules
·
Wikipedia / public sources on GST 2.0 reforms