Decoding TDS Rules on Online Ads, Software Tools, E-commerce Sales

Small businesses face cash-flow issues and compliance hurdles as TDS must be paid upfront and reclaimed later

- Shipra Singh

Every month, Ranjani Purohit, a women's apparel manufacturer and seller in Jaipur, has to set aside an extra ₹50,000 just to fulfill her tax deducted at source (TDS) obligations.

Purohit is liable to deposit 2% TDS on the advertisements she runs on Facebook, Google and other online marketplaces, but is forced to pay this tax out of pocket, given the nature of these transactions.

Big marketplaces such as Facebook and Google typically demand full payment upfront for running ads, without any deductions. This is contrary to the very definition of TDS, said Lokendra Singh Tomar, a chartered accountant (CA) in Jaipur.

"TDS provisions require the payer to withhold tax at the source, deposit it with the government on behalf of the receiver, and remit the remaining payment. But big companies such as Google, Meta, Amazon and Flipkart have structured TDS provisions applicable to payments made to them on reimbursement basis."

Cash crunch for small business

Terms laid out by these marketplaces clearly state that the business has to make the full payment for prepaid ads. This leaves no option for businesses than to deposit the TDS out of pocket and get it reimbursed later, Tomar added.

While the reimbursements are honored in full, unless there are discrepancies in the claimed amount, the process often blocks substantial capital for businesses with big advertising spends, often creating a cash-flow crunch for small entities.

"The reimbursements can only be filed once every quarter. On an average, ₹1-1.5 lakh of my business's working capital gets blocked for three months in TDS paid towards online ads," said Purohit.

Apart from online advertisements, TDS is structured similarly for certain types of fees that sellers have to pay to e-commerce websites and for subscriptions of online services such as Microsoft Office, Adobe, and cloud services, among others.