For Indian e-commerce players, the proposed tax collected at source (TCS) on them under the much-awaited goods and services tax (GST) being capped at one percent, failed to bring much cheer into the sector marred by valuation tumbles and massive layoffs.

According to industry experts, while the government is on the right track with the decision of GST Council to cap the percentage, the problem is with TCS itself.

The draft law proposed a levy of one percent without any limit and also said that the cap in the law would ensure the levy remains below that level.

Many e-commerce companies said the whole concept of tax collection at source is flawed and just capping the percentage would not solve any problems.

"We enable several lakh small and medium business to digitisation their businesses and become part of the formal economy both online and offline. GST is a welcome piece of tax legislation and accelerates our ability to extend economic inclusion to the masses of India. But we feel that we are being asked to carry a larger burden of compliance which impacts our cost of doing business, for example, mandatory TCS collection, mandatory GST registration for online micro small business unlike their offline counterparts," Sanjay Sethi, co-founder and CEO, Shopclues.com.

According to the Flipkart top boss, around Rs 400 crore of working capital would get locked up every year at the current scale. He added that it would deter small and medium enterprises and sellers from selling on e-commerce platform or go digital in their business.

Under TCS, e-commerce marketplaces will have to deduct a portion of the amount payable to sellers on their platform and remit it to the government.

"We believe we have made a significant difference to the whole ecosystem... There are hundreds and thousands of sellers online and a lot of them are entrepreneurs, some of them are offline retailers... we have come a long way in creating this ecosystem," Flipkart co-founder Sachin Bansal had said earlier.

Industry experts also pointed out that while one percent tax cap is fine, the problem is with compliance. "Tax collected at source (TCS) would increase a lot of compliance, a lot more disclosures would have to be made and costs would be high as the volume of data would increase. The intention of the government is right and one percent TCS is fine, having said that it would mean an increase in compliance for the sector," Amarjeet Singh, Partner, Tax, KPMG in India.

Senior government officials said that the decision to cap TCS for e-commerce companies at one per cent likely stems from meetings between industry representatives and government policy-makers. "It has likely been offered as a sort of a sweetener, so to speak, for e-commerce players," said an official. Though

TCS is a direct tax which comes under the jurisdiction of the central board of direct taxes (CBDT), changes can be made to it under GST draft laws. It will, however, require concurrent amendments in the income tax act as well, sources said.