Understanding the Section-194O-TDS on payments made to E-commerce participants

Union budget of 2020 has mentioned and introduced section 194O. As per section 194O, an E-commerce operator is needed to deduct TDS to facilitate any sale of goods or offer services via an E-commerce participant. TDS on E-commerce operators under section 194O will be applicable from the 1st of October, 2020.

Defining E-commerce operators and participants

E-commerce operator – an e-commerce operator is known as who possesses, operates, or manages an electronic/digital facility for the sale of goods and services. He/she is liable for making payments to the e-commerce participants on such sales.

Also Read: Types of Corrections in TDS Returns

E-commerce participants – an e-commerce participant is an individual who sells goods, services, or both via an electronic facility given by an e-commerce operator. He/she has to be a resident of India.

Ambit of section 194O

Deduction of TDS by e-commerce operator has to be done at the rate of 1% at the time of amount’s credit of sale of goods, services, or both to the account of an e-commerce participant or while making payment to an e-commerce participant by other optional modes, whichever comes first.

E-commerce participant being a resident individual or HUF – e-commerce operator is not needed to deduct TDS if the gross amount of sale of goods and services or both during the previous year does not go beyond Rs. 5 Lacs and if e-commerce participant has published his/her Aadhar or PAN card.

If the e-commerce participant does not publish his/her Aadhar or PAN card, TDS has to be deducted at the rate of 5%, according to the provisions of section 206AA.

E-commerce participant being a non-resident. – As mentioned above, an e-commerce participant has to be a resident of India. Hence, if a participant is a non-resident, then no TDS shall be deducted. 

For instance, a proprietary firm ABC (e-commerce participant), sells its products via Amazon (e-commerce operator). Mr. Anil purchases this product online from ABC for Rs. 20000 on the 1st of April, 2020.

Amazon credits ABS’s account on the 1st of April, 2020, but the customer directly makes the payment to ABC on the 15th of April, 2020.

Here, Amazon is needed to deduct TDS @1% on Rs. 20000 at the time of credit to the party or make the payment, whichever comes first. In such a scenario, TDS has to be deducted on the 1st of April, 2020.

Objective of section 194O

The introduction of section 194O aims to broaden the base of TDS via bringing e-commerce participants under the tax. Of late, customers favor digital platforms for buying or selling goods and services due to;

– From the sellers’ perspective – it needs lesser cost for generating the setup and lesser efforts in search out of potential buyers.

– From the buyers’ perspective – various options are available on one platform, and product comparisons can be made quickly.

This has provided the thrust in the numbers of e-commerce users over some time. It is tedious to locate small sellers (e-commerce participants) who do not submit their ITR. Hence, no government has extended the tax base’s horizon to bring such e-commerce participants under the tax base.

Section 194O, exceptions, if any

– Non-resident e-commerce participants are excluded/exempted from the horizon of section 194O.

– A threshold limit of Rs. 5 Lacs is mentioned for only resident individuals and HUF. Hence, an e-commerce operator does not need to deduct the TDS if the amount paid or credited to individuals or HUF during the financial year does not go beyond Rs. 5 Lacs.

Legal statute before section 194O

Betimes, there was no deduction of tax on payments made to e-commerce participants. They were compelled to submit their ITR (income tax return) independently. Therefore, many small e-commerce participants did not submit their ITR and bypassed the tax liability.  

Ambit of TDS on e-commerce transactions beneath the section 194O

The purpose of bringing in the new section is to bring the e-commerce participant within the tax net’s purview. For example, there would be transparency on the seller of goods and service providers’ income via digital platforms.

Provision of which are given below;

• TDS is be paid by e-commerce operators for the facilitation service of selling goods and services providers offered through its electronic facility or digital platform. TDS’ burden of payment is kept on the mediator betwixt seller and buyer to put it in other words.

• E-commerce operator is needed to deduct TDS at the time of payment or credit, whichever comes first. Here, credit means a credit to an e-commerce participant’s account, and payment means a payment made via any other mode.

• Additionally, this section offers is that if a buyer of goods and services has already made a payment directly or an e-commerce participant, it would be considered that the e-commerce operator has made a payment or account has been credited by the e-commerce operator. The same would be added to the gross amount for the objective of tax deduction.

Also Read: Section 194C – TDS on Payment to Contractor

TDS rate under section 194O on e-commerce transactions

Under this section, TDS would be deducted by e-commerce operators at the rate of 1% or the rate of 5% (only for Non-PAN and Aadhar card cases). Simply, TDS would be deducted at the rate of 1% in every case, excluding cases in which e-commerce participant does not possess PAN or Aadhar card number; in those cases applicable rate would be 5%.

Other provisions of section 194O-TDS on e-commerce transactions

All other left-out provisions of the chapter TDS of the act would be applied such as submission of TDS form, provision surrounding the payment of TDS, other provisions related to non-deduction or lower deduction/non-submission of return/non-payment post deduction would be remain as applicable as stated in the chapter of TDS of the act. The introduction of section 194O would result in the upliftment of revenue for the government by minimalizing tax evasion.