Section 194O – TDS On Payments Made To E-commerce Participants

Section 194O has been introduced in the Union Budget 2020. According to Section 194O, an E-Commerce operator is required to deduct TDS for facilitating any sale of goods or providing services through an E-Commerce participant. TDS on E-commerce operators under section 194-O is applicable from 1 October 2020. 

Dive into this blog for a better understanding of the following:

• Recent Budget Update in section 194-O
• Introduction to E-commerce operators and participants
• Scope of Section 194-O
• Time of deduction of TDS
• Purpose of Section 194-O
• Exceptions to Section 194-O
• Law Before Section 194-O
• E-commerce vs OIDAR
• Conclusion

Budget 2024 Update

The TDS rate has been proposed to be decreased to 0.1% from 1% with effect from 1st October, 2024.

Who Are E-Commerce Operators And Participants?

E-Commerce Operator 
An E-commerce operator is a person who owns, operates, or manages a digital/electronic facility for the sale of goods and services. He is responsible for making payments to the e-Commerce participant on such sales.

E-Commerce Participant 
An E-commerce participant is a person who sells goods, services, or both through an electronic facility provided by an E-commerce operator. He must be a resident of India.

Scope Of Section 194O

E-commerce operators shall deduct TDS @ 1% (This rate is reduced to 0.1% with effect from 1st October, 2024) of the gross amount of the sale of goods, provision of services, or both made by the e-commerce participant on the platform facilitated by the e-commerce operators.

E-commerce Participant Being a Resident Individual or HUF 
E-commerce operators are not required to deduct TDS if the gross amount of sale of goods, services, or both during the previous year does not exceed Rs 5 lakh and if the E-commerce participant has furnished his PAN or Aadhaar.

If the E-commerce participant does not furnish his PAN or Aadhaar, TDS must be deducted at the rate of 5%, as per provisions of Section 206AA.

E-Commerce Participant Being a Non-resident
As stated earlier, an e-Commerce participant must be a resident of India. Thus, no TDS will be deducted if the participant is a non-resident.

For example, a proprietary firm, XYZ (an e-commerce participant), sells its products through Flipkart (an e-commerce operator). Mr A bought this product online from XYZ for Rs 50,000 on 1 April 2024. 

Flipkart credited XYZ's account on 1 April 2024, but the customer made the payment directly to XYZ on 15 April 2024. 

Here, Flipkart is required to deduct TDS at 1% (0.1% with effect from 1st October, 2024) on Rs 50,000 at the time of credit to the party or making payment, whichever is earlier. In this case, TDS should be deducted on 1 April 2024.

Time Of Deduction Of TDS Under Section 194O

The deduction is to be made at the time of crediting the amount of the sale of goods or services or both to the account of an e-commerce participant or at the time of payment thereof to such e-commerce participant by any mode, whichever is earlier.

Purpose Of Section 194O

The purpose of the introduction of Section 194O is to widen the TDS base by bringing E-commerce participants under the tax. Of late, customers prefer digital platforms for buying or selling of goods and services because:

From Sellers’ Perspective 
It requires less cost for creating the setup and less effort for the search of buyers.

From Buyers’ Perspective 
Many options are available on one platform, and the comparison of products becomes very easy. 
This has resulted in an increase in the number of E-commerce users over time. It is difficult to identify small sellers (E-commerce participants) who don’t file their income tax returns. Thus, the government has enlarged the tax base to bring such e-Commerce participants under the tax base.

Exceptions To Section 194O

• Non-resident E-commerce participants are exempted from the scope of this section.
• A ceiling limit of Rs 5 lakh is set only for resident individuals and HUF. Thus, an E-commerce operator is not required to deduct TDS if the amount, paid or credited to individuals/HUF during a financial year, does not exceed Rs 5 lakh.

It is to be noted that the TDS rate under Section 194O has been proposed to be decreased to 0.1% from 1% with effect from 1st October, 2024.

Law Before Section 194O

Earlier, there was no tax deduction on payments made to e-Commerce participants. They were required to independently file their income tax returns. Therefore, many small e-Commerce participants didn’t file their income tax returns and escaped the tax liability.

E-Commerce vs OIDAR

Conclusion

Including Section 194O in the Income Tax Act of India is a significant development aimed at regulating tax compliance in the e-commerce industry. Earlier, there were no rules for tax deductions on payments made to e-commerce participants, which allowed them to evade their tax liabilities.

As the e-commerce landscape in India continues to grow, all stakeholders need to stay updated on the latest laws and adhere to government regulations.