1. 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.
2. Scope of Section 194O
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 January 2020.
Flipkart credits the account of XYZ on 1 January 2020, but the customer makes the payment directly to XYZ on 15 January 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 January 2020.
3. 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 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.
4. Exceptions to Section 194O, if any
1. Non-resident e-Commerce participants are exempted from the scope of this section.
2. 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.
5. 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.
The introduction of Section 194O will result in an increase in the revenue for the government by reducing tax evasion.