Section 194O | TDS on Payment by e-commerce operator

Overview

The concept of e-commerce has rapidly transformed the global business landscape, and India has not remained untouched by this digital revolution. In the wake of increased digital transactions and the rise of online platforms, the Indian government has taken several steps to regulate and streamline the taxation process for e-commerce transactions. One of the significant provisions introduced in this regard is Section 194-O of the Income Tax Act, 1961, which mandates the deduction of Tax Deducted at Source (TDS) on payments made to e-commerce participants by e-commerce operators.

This article delves into the key aspects of Section 194-O, focusing on its applicability, provisions, and compliance requirements for e-commerce operators and participants.

Understanding Section 194O | TDS on Payments by e-commerce operator.

Section 194-O was introduced by the Finance Act, 2020, to ensure that the income generated through e-commerce platforms is adequately taxed at the source. This section applies to e-commerce operators who facilitate the sale of goods and services through their platforms and act as intermediaries between the sellers (e-commerce participants) and the customers.

To understand Section 194O, TDS on Payments by e-commerce operators you need to to understand first meaning of certain terms, which are:

Meaning of e-commerce operator:

E-commerce operator means a person who owns, operates or manages an electronic facility or platform for e-commerce. For example Amazon, Flipkart etc.

Meaning of e-commerce participant:

E-commerce participant is a resident person who is selling goods or services through an e-commerce operator facility or platform. For example Vendors of amazon or flipkart.

Meaning of e-commerce:

E-commerce (electronic commerce) refers to the buying and selling of goods and services over the internet. It involves online transactions, digital payment systems, and electronic data exchange, enabling businesses and consumers to interact without physical storefronts.

Under Section 194-O, e-commerce operators are required to deduct TDS at the time of credit or payment (whichever is earlier) to the e-commerce participant. This applies to the payment made by the operator for the sale of goods or provision of services facilitated through the platform.

Applicability of Section 194O

As per section 194-O, TDS on payment by e-commerce operator; “Any person (e-commerce operator) making payments to an resident person in India (e-commerce participant) must deduct tax at a rate of 1% at the source”. With effect from 1st October 2024, TDS rate has been reduced to 0.1%.

Exception to section 194O:

No TDS u/s 194O is required to be deducted if all the following conditions are satisfied:

• The e-commerce participant is an Individual or HUF.
• The gross amount from sale of goods or services or both during the financial year (FY) is up to ₹5 Lakhs.
• The e-commerce participant has furnished his PAN or Aadhar to the e-commerce operator.

Threshold limit and Rate of TDS u/s 194O

Threshold limit: The requirement to deduct TDS under Section 194-O is not subject to any minimum threshold limit for the transaction value. Therefore, TDS must be deducted on every transaction, irrespective of its size. For example, even ₹10 paid is subjected to TDS under this section.

TDS rate: “Any e-commerce operator making payments to an e-commerce participant must deduct tax from Gross amount of sale at a rate of:

Note: The rate of TDS will be further increased by Surcharge and Health and Education Cess, in case payment is made to a Non-resident Indian.

What is the Gross amount of sale?

Gross amount of sale is the Price which is collected from customers by E-commerce operators.

When to deduct and deposit TDS u/s 194O?

Time of Deduction: Under section 194E, TDS is required to be deducted at the earlier of the following:-

• At the time of credit of such income; or,
• At the time of payment of such sum in cash or by cheque or by any other mode.

Time to Deposit:

TDS from payments by e-commerce operators which is deducted u/s 194O and is required to be deposited to the central government. Time to deposit TDS u/s 194O is given below:

For example, TDS is deducted on 15th December and needs to be deposited on or before 7th January. Tax is deducted on 21st March ; needs to be deposited on or before 30th April.

If TDS is deducted by the government department: The Government Department shall deposit the tax on the same day on which tax has been deducted.

Example for section 194O

Customer, Amazon (E-Commerce Operator), and Vendor (E-Commerce Participant)

Let's illustrate how Section 194O of the Income Tax Act works with a practical example involving three parties:

• Customer – A buyer who purchases a product.
• Amazon – The e-commerce operator facilitating the transaction.
• Vendor – The seller (e-commerce participant) listing products on Amazon's platform.

Scenario

• Customer purchases a smartphone from Vendor on the Amazon platform.
• The total sale value of the smartphone is ₹20,000.

Here's how Section 194O would apply in this transaction:

Step-by-Step Breakdown

• Transaction Occurs:
  Customers buy the smartphone for ₹20,000 from Vendor through the Amazon platform. The payment of ₹20,000 is made by Customer to Amazon which is the intermediary.
• Amazon (E-Commerce Operator) Role:
  Amazon, as the e-commerce operator, facilitates the sale and acts as the intermediary between Vendor and Customer. Amazon is responsible for deducting TDS under Section 194O before making the payment to Vendor.
• TDS Deduction:
  According to Section 194O, Amazon must deduct TDS at the rate of 1% of the gross amount of sale made by Vendor. Gross amount of sale = ₹20,000. TDS = 1% of ₹20,000 = ₹200.
• Amazon Pays Vendor:
  After deducting ₹200 as TDS, Amazon will transfer ₹19,800 (₹20,000 - ₹200) to Vendor.
• TDS Remittance:
  Amazon must deposit the ₹200 TDS with the government within the prescribed time frame (typically by the 7th of the following month).
• Issuance of TDS Certificate:
  At the end of the quarter, Amazon will issue a TDS certificate (Form 16A) to Vendor, showing the ₹200 TDS deducted and deposited with the government.
• Claiming TDS Credit:
  Vendors can use the TDS certificate to claim the ₹200 as a credit when filing their income tax return for the year. If Vendor total tax liability is more than ₹200, they can adjust this amount against their tax dues. If Vendor has a lower tax liability, they can use this TDS amount to claim a refund from the government.

Additional points

Any payment made by a purchaser of goods or services ‘directly to an e-commerce participant’ but sale is facilitated by e-commerce operator, shall be deemed to be the amount paid / credited by e-commerce operator to e-commerce participant and shall be included in gross amount for the purpose of TDS.

If TDS deducted u/s 194O (or not deductible due to ₹5 Lakhs limit), TDS cannot be deductible under any other section. However, this rule is not applicable if the amount received by e-commerce operators for hosting advertisement or providing any other services which are not related to sale of goods/services.

This section includes sale of ‘goods as well as service’ and service includes fees for professional and technical service also. If any professional or technical service is provided through online mode then this section is applicable.

For example, services provided by Urban Clap.

CBDT Clarifications

Payment gateways are not required to deduct tax u/s 194O, if the tax has been deducted by the e-commerce operator u/s 194O of the Act, on the same transaction.

Applicability of Section 194O on insurance agents or insurance aggregators:

In years subsequent to the first year, if the insurance agent or insurance aggregator has no involvement in transactions between insurance company and the buyer of insurance policy, he would not be liable to deduct tax u/s 194O for those subsequent years. However, the insurance company shall be required to deduct tax on commission payment, if any, made to the insurance agent or insurance aggregator for those subsequent years under the relevant provisions of the Act.

Example: HDFC ERGO sold an insurance policy through PolicyBazaar.com. Suppose in the current year policybazaar.com collected an insurance premium of ₹2 Crores for the first year of insurance so in this case policybazaar.com required to deduct TDS of HDFC ERGO. In subsequent years policy holders directly making payment to HDFC ERGO then PolicyBazaar.com were not required to deduct TDS. However, HDFC ERGO is required to deduct TDS u/s 194D on commission paid to PolicyBazaar.com.

Consequences of Non-compliance u/s 194O

Following are the consequences and penalties for non-compliance with section 194O:

• Penalty u/s 271C:
  “Penalty on failure to deduct and deposit TDS”, if person fails to deduct the tax as required u/s 194O shall be subjected to a penalty u/s 271C.
  The penalty amount cannot exceed the amount of TDS required to be deducted.
• TDS is not deducted:
  If a deductor has not deducted the TDS as required under Section 194O, it charges interest of @1% per month till the date TDS is deducted.
• TDS is deducted but not deposited:
  If a deductor has deducted the TDS as required under Section 194O but has not deposited the collected tax to the government, then it charges interest @1.5% from the date when tax is deducted to the date of deposition.

Why choose Bizfoc for TDS?

At Bizfoc, we specialize in providing you the best accounting services in filing your TDS. Here are the reasons why we are known for our services to our clients on filing TDS:

• Assist in suggesting the right documents for TDS filing.
• Providing valuable insights on sections of TDS computations
• Prescribe forms as per the necessity
• Helps in accurate computations for TDS computations and returns
• Tailored advice and guidelines for TDS filing

In general, we assist the client to solve their queries and doubts regarding the documentation, procedures, and fees for filling out the form. Other than making your filing successful, we help you make a better decision by covering every aspect of what you actually need to get your TDS.

Conclusion

Section 194-O aims to ensure that e-commerce transactions are adequately taxed at the source, making the tax collection process more efficient and transparent. E-commerce operators play a critical role in this process by deducting TDS on behalf of e-commerce participants and ensuring compliance with the Income Tax Act.

For e-commerce operators, compliance with Section 194-O requires setting up efficient systems for deducting and remitting TDS, issuing TDS certificates, and filing timely returns. E-commerce participants, on their part, should stay informed about their TDS obligations and ensure that they can claim credit for the tax deducted while filing their annual income tax returns.

As the e-commerce industry continues to grow, the government’s focus on regulating tax deductions at source will likely lead to a more organized and accountable digital economy in India.

Frequently Asked Questions? (FAQs)