All you need to know on Applicability of TDS on E Commerce under Section 194O of Income Tax Act

Introduction 

Section 194O of Income Tax Act was mentioned and introduced in the Union budget for 2020. To support the sale of products or supply services via an E-commerce participant, an E-commerce operator is required to deduct TDS under section 194O. This article focuses on TDS on E Commerce, Section 194O Applicability and TDS on E Commerce under Section 194O.

What is TDS on E Commerce?

According to Section 194O, when crediting an E-Commerce participant’s account the amount of sales of products or services, or both, or when making payment to an E-Commerce participant by any other means, whichever comes first, the operator of the E-Commerce site should deduct TDS at the rate of 1%. 

Section 194O Applicability

• If an E Commerce Participant being a Resident Individual or HUF

If the gross value of goods, services, or both sold during the previous year does not exceed Rs 5 lakh and the e-Commerce participant has provided his PAN or Aadhaar Card, the e-commerce operator is not required to deduct TDS.

TDS (Tax Deducted at Source) shall be deducted at a rate of 5% if the e-Commerce participant does not provide his PAN (Permanent Account Number) or Aadhaar, according to Section 206AA.

• If an E-commerce Participant is a Non-Resident Indian

An e-Commerce participant must be a resident of India, as previously indicated. As a result, if the participant is a non-resident, no TDS will be deducted.

For example, a private company ABC (e-commerce participant) sells their goods on Amazon (e-commerce operator). On October 1, 2020, Mr X purchases this merchandise from ABC for INR 45,000 online.

On October 1, 2020, Amazon credits ABC account, but the client pays ABC personally on October 15, 2020.

Amazon is required to deduct TDS of 1% on INR 45,000 at the time of crediting or paying the party, whichever comes first. TDS should be deducted on October 1, 2020 in this situation.

Motive of Section 194O of Income Tax Act

Section 194O’s goal is to broaden the TDS base by bringing e-commerce participants into the tax net. Customers nowadays prefer digital channels for buying and selling goods and services because:

• From the perspective of the seller, it necessitates a lower cost for setting up the system and fewer efforts in prospecting.
• From the buyer’s perspective, a large number of options are available on a single platform, and products maybe rapidly compared.

This is the primary cause behind the recent rise in the number of e-commerce consumers. Small sellers that do not reveal their ITR (Income Tax Return) are difficult to find. As a result, the government has not expanded the tax base horizon to include such e-commerce participants.

Applicability of TDS on E Commerce under Section 194O of the Income Tax Act

The purpose of the new section is to bring e-commerce players into the tax net, i.e., to offer clarity on the income received by agents of goods or service suppliers via digital platforms. The section’s terms are as follows:

• The TDS will be handled by e-commerce executives for the purpose of facilitating the sale of products or services provided by the company through its digital or automated facility or platform. In other words, an escrow account between the buyer and seller is responsible for TDS payment.
• TDS is likely to be deducted by e-commerce executives at the time of credit or refund, whichever comes first. A credit is a credit to an e-commerce associate’s account. And the payment denotes any type of payment.
• Furthermore, if a purchaser of goods or services receives payment immediately from an e-commerce associate, it is presumed that the e-commerce executive has made an adjustment or that the account has been charged by the e-commerce operator, and the same shall be calculated in the total amount for tax deduction.

Exceptions to the Section 194O Rule

Section 194O contains below exceptions:

• The scope of section 194O does not apply to non-resident e-commerce participants.
• Only resident people and Hindu Undivided Families are subject to a minimum limit of INR 5 lacs. As a result, if the amount paid or credited to individuals or HUF (Hindu Undivided Family) in a financial year does not exceed INR 5 Lacs, an e-commerce operator is exempt from deducting TDS (Tax Deducted at Source)

FAQs on Section 194O under Income Tax Act

1. Who is liable for deducting TDS under the Income Tax Act of 1961, Section 194O?

Any E-commerce operator who facilitates the sale of products or the provision of services to an E-commerce Participant using a digital or electronic facility or platform (by whatever name called).

2. Who are the players and operators in e-commerce?

• E-commerce operator: A person who owns, maintains, or operates an electronic or automated mechanism for the exchange of products and services is known as an e-commerce operator. On such purchases, they are responsible for delivering money to the e-commerce participant.
• E-commerce associate: An e-commerce associate is a person who exchanges services, goods, or both through an e-commerce operator’s electronic or automated facility. They must be Indian citizens or residents.

3. TDS under Section 194O is not deductible in what circumstances?

Where an e-commerce participant is an individual or a HUF, and the gross amount of such sales or services, or both, during the previous year did not exceed five lakh rupees and the e-commerce participant provided the e-commerce operator with a PAN or Aadhaar Number, no TDS is to be deducted.

4. What are the laws before Section 194O of the Income Tax Act?

Previously, payments given to e-Commerce participants did not qualify for a tax deduction. They were required to file their tax returns on their own. As a result, many minor e-Commerce players failed to file their income tax returns, allowing them to avoid paying taxes. 

Conclusion

The adoption of Section 194O will result in an increase in revenue for the government by reducing tax evasion. We hope that this post has helped you understand how TDS Section 194O will impact your e-commerce business. Subscribe to our weekly email to stay up to date on the latest tax developments and how they affect your business.