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.
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.
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.
E-Commerce operators should deduct TDS @1% at the time of credit of the amount of sale of goods, services, or both to the account of an e-commerce participant or at the time of making payment to an e-Commerce participant by any other mode, whichever is earlier.
E-commerce participant being a resident individual or HUF
E-commerce operator is 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 (e-commerce participant) is selling its products through Flipkart (e-commerce operator). Mr A buys this product online from XYZ for Rs 50,000 on 1 October 2020.
Flipkart credits the account of XYZ on 1 October 2020, but the customer makes the payment directly to XYZ on 15 October 2020.
Here, Flipkart is required to deduct TDS @1% 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 October 2020.
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 the sellers’ perspective
It requires less cost for creating the setup and less effort for the search of buyers.
From the buyers’ perspective
Many options are available at one platform and the comparison of products becomes very easy.
This has resulted in an increase in the number of e-Commerce users over a period of 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.
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.
The introduction of Section 194O will result in an increase in the revenue for the government by reducing tax evasion.