Section 194O: (TDS on Payments to E-Commerce Participants)

Section 194O of Income Tax Act has been introduced vide union budget 2020. As the e-commerce businesses are increasing day by day. E-commerce participants used to sell their product through e-commerce operators (say. Flipkart, Amazon etc.).

Earlier to the introduction of this section 194O e-commerce participants were not filling their income tax returns. At the same time there are a large number of e-commerce participants and keeping track of these by the government was very difficult.

So section 194O put the responsibility of deducting TDS while making payments to e-commerce participants.

In this way the government is able to collect revenue from a large number of e-commerce participants.

Let’s have a look at some important terms which need to be understood for section 194O of Income Tax Act 1961.

Who are E-Commerce Operator and Participant under section 194O?

E-Commerce Operator:

A person who owns, operates or manages a digital platform for e-commerce and responsible for making payment or e-commerce participants on sale of goods or services or both.

E-Commerce Participant:

A person who sells its goods or services or both through an electronic platform i.e. e-commerce operator and in returns receives payment from ecommerce operator on sale. For the purpose of this section 194O e-commerce participants must be residents of India.

Example:

Suppose Mr X is selling its goods through Amazon. Customers buy goods of Mr X from Amazon and in such a way Amazon provides a customer base to Mr X. So in this example Mr X is an e-commerce participant and Amazon is an e-commerce operator.

Also Read: Section 271AAD: (Penalty for Fake Invoices / False Entry)

What is section 194O of Income Tax Act?

Section 194O applies for deduction of TDS on payments made to e-commerce participants by e-commerce operators. E-commerce participants sell their product through E-commerce operators and earn revenue.

But Customer (who buys the products from the e-commerce operator) makes the payment to the e-commerce operator and then the e-commerce operator makes the payment to the e-commerce participant.

So this section 194O says that while making payment or at the time of credit the amount of sale to the account of an e-commerce participant, it is the responsibility of the e-commerce operator to deduct TDS.

Who is liable to deduct TDS under section 194O?

As per section 194O e-commerce operator is responsible to deduct TDS while making payment to e-commerce participants.

Example:

In our earlier example Amazon (e-commerce operator) is responsible to deduct TDS from Mr. X (e-commerce participant).

Also Read: Section 194M: (TDS on Payment to Contractors and Professionals)

When to deduct TDS under section 194O?

Under section 194O, TDS to be deducted by e-commerce operator:

At the time of crediting the amount of sale of goods or services or both (in other words crediting the amount in the account of e-commerce participant); or
At the time of making payment to e-commerce participant by any mode;

whichever is earlier.

What is the rate of TDS under section 194O?

E-commerce operators have to deduct TDS @1% at the time of crediting the amount of sale or at the time of making payment whichever is earlier.

It is the responsibility of e-commerce operators to deduct TDS @1% before making payment to e-commerce participants.

[TDS Rate 0.75% from 14-05-2020 to 31-03-2021].

In case of PAN or Aadhar not provided to e-commerce operators then the rate of TDS would be 5%.

Cases	Rate of TDS
Normal Rate	1%
[TDS from 14-05-2020 to 31-03-2021]	0.75%
PAN or Aadhaar not provided	5%

Also Read: Section 194N of Income Tax Act (TDS on Cash Withdrawal)

What is the applicability under section 194O?

E-commerce Participant	Gross amount of sale during previous year	TDS Rate
Resident individual or HUF	Does not exceed Rs. 5 Lac	No TDS (Provided, PAN or Aadhaar provides to e-commerce operator)
Resident individual or HUF	Exceed Rs. 5 Lac	TDS @1%
Non Resident	------	TDS not apply
Others	------	TDS @1%

In case PAN or Aadhaar not available then rate of TDS is 5%.

So by analysis the table we understood that the exception of section 194O is:

Resident individual or HUF whose gross amount of sale during previous year does not exceed Rs.5 Lac and he has provided PAN or Aadhaar then no TDS to be deducted.

There is no TDS on non-resident e-commerce participants.

Important points to be noted:

If an e-commerce participant receives payment directly through a customer then it is deemed to be the amount credited or paid to the e-commerce operator to the e-commerce participant and it shall be included in the gross amount of sale for the purpose of deducting TDS.
Section 194O does not apply to the amount received or receivable by an e-commerce operator for hosting advertisements or any other services that are not connected with sale or service.
TDS to be deducted on gross amount of sale of goods, service or both.

Conclusion

Section 194O of Income Tax Act covers the entire e-commerce participant under the provision of TDS. Now, none of the e-commerce participants can avoid tax by not filing their income tax return.

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