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.

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% of the gross amount of sale of goods or 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 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 April 2024. 

Flipkart credits the account of XYZ on 1 April 2024, but the customer makes the payment directly to XYZ on 15 April 2024. 

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 April 2024.

Time of Deduction of TDS under Section 194O

The deduction is to be made at the time of credit of amount of 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 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.

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.

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.

Conclusion

The introduction of Section 194O will result in an increase in the revenue for the government by reducing tax evasion.