The government should rethink its move to levy, come October 1, a 1% tax deducted at source (TDS) on sales facilitated by an ecommerce platform.

The move would discourage micro and small enterprises and even many medium ones, at a time when their finances are stressed and they need to conserve all the resources they can.

This is in addition to the 1% tax collected at source (TCS) that ecommerce operators have to comply with. The net result is to squeeze the margins of MSMEs, already in the single digits.

The government should abandon the move or postpone it till the next financial year, by which time the economy would be in a better shape.

The TDS levy, to ostensibly check tax evasion, is to be paid by ecommerce operators on the gross amount of sales of goods or services facilitated by them through their digital platform, inclusive of taxes, and does not allow for returns to be adjusted.

TCS, in contrast, is on sales net of returns, which can be as high as 30% online. If after tax and the ecommerce platform’s fees, the seller gets 80% of sales after returns, what it would receive in hand is 56% of gross sales.

The 1% TDS would be 1.8% of net revenue, and, given MSMEs’ low margins, 1% TDS would mean blocking perhaps a quarter of a micro enterprise’s income with the taxman.

That might deter many from embracing the opportunities of digital transactions right when their salience is growing. Enforcing TDS also runs contrary to the relaxations given by the government to online sellers and ecommerce marketplaces to counter the impact of the pandemic-induced slowdown.

Without a doubt, ecommerce platforms are beneficial to MSMEs, which save on the costs of marketing, logistics and delivery.

eCommerce enables them to gain from economies of scale, enhance their customer base and also tap the overseas markets for exports in an efficient and cost-effective way.

Instead of levying a TDS that will adversely impact the supply chains, the government should pursue audit trails of GST to examine the books of these companies.