Section 194O: TDS on Payment to E-Commerce Operator
Updated: Oct 3
The digital marketplace has grown rapidly, with millions of transactions happening online every day. To ensure tax compliance within this thriving sector, the government introduced Section 194O of the Income Tax Act. This section mandates the deduction of Tax Deducted at Source (TDS) on payments made to e-commerce participants through platforms such as Amazon, Flipkart, or any other digital marketplace.
Effective from October 1, 2020, Section 194O requires e-commerce operators to deduct TDS on the gross amount of sales or services facilitated through their platforms. This provision applies to resident e-commerce participants when their annual transactions exceed INR 5 lakh. By enforcing TDS at the source, this section ensures that tax obligations are met efficiently, reducing the possibility of tax evasion in the ever-expanding online space.
In this blog, we will deep dive into the key aspects of Section 194O, including the rates, thresholds, and obligations for both e-commerce operators and participants.
Table of Contents
Section 194O aims at ensuring tax compliance. It makes the collection of taxes from such transactions smooth and thereby widens the tax base. In this regard, on every sale through an e-commerce platform, the operator is required to make a specified percentage deduction as TDS before making payments to such sellers or the service providers. In this article, we will closely examine the intricacies of Section 194O with regard to its implications for both e-commerce operators and participants.
What is Section 194O: TDS on Payment to E-Commerce Operator
Section 194O of the Income Tax Act is a newly incorporated provision for ensuring tax compliance by an e-commerce operator in respect of payment made to participants for selling their goods or provision of services through their platform. The core aim of this provision is to explain in detail and enforce taxes on a particular class of transaction, especially digital platform transactions that have grown in an exponential manner. It basically aims at widening the tax base in instances where such a class of transactions are excluded from the tax radar due to the nature of doing business on such digital platforms.
Applicability to E-Commerce Transactions
Let us see how Section 194O applies to e-commerce transactions:
E-commerce Operator: Any person who owns, operates, or manages such digital or electronic facility or platform for electronic commerce. Examples may include online marketplaces, retail websites, and app-based taking facilitation of trade of goods and services.
E-commerce Participant: This refers to any person who sells stuff or services through an electronic platform. The participant may be a person, company, or any entity conducting business through these platforms.
TDS Deduction: It is supposed to make a TDS deduction at the rate of 1% from the gross amount of sales or services facilitated through its platform.
Threshold Limit: TDS would apply only if the amount paid or credited to an e-commerce participant is in excess of INR 5 lakhs during the previous year.
Payment of TDS: The TDS deducted has to be deposited with the government within the specified time limits. This shall be the responsibility of the e-commerce operator to comply with this requirement on time on accurate terms.
Applicability of Section 194O of the Income Tax Act
Who is an E-commerce Operator under Section 194O?
According to section 194O of the Income Tax Act, an e-commerce operator is someone who owns or operates a digital or electronic facility or platform for electronic commerce. This has further been elaborated to include the following kinds of platforms:
Online Marketplaces: It means a website or application or a portal that supports buyers and sellers in connecting and transacting directly in a way that goods, services, or both can be searched, chosen, and purchased through it.
Retail Portals: Retail portals are those that sell products or services to the consumers through online transactions.
Ride-sharing: Under ride-sharing applications, a user needs a ride, and then based on the request, the application connects the commuter to the driver.
Food Delivery: A company that provides customers with apps or websites for them to order food from local restaurants.
Streaming: Digital entertainment which renders services directly to the consumer. This can be based on music, movies, or a limited number of TV shows.
Who is an E-commerce Participant?
Any individual or business offering goods and services through an electronic platform operated by an e-commerce operator is referred to as an e-commerce participant. The following are the major characteristics of e-commerce participants:
Sellers of Goods: These are providers or firms selling goods through e-commerce sites. This ranges from books and electronics to clothes and accessories.
Service Providers: These are the professionals or companies that are providing services through e-commerce platforms. For instance: freelance writing, graphic design, consulting, or home repair services.
Gig Workers: People in temporary or contract work, often through apps that connect them to short-term opportunities, such as ride-sharing and food delivery.
For example, ABC Enterprises, a sole proprietorship (an e-commerce participant), sells its products through Amazon (an e-commerce operator). On 1 May 2024, Mr. B purchased a product from ABC Enterprises for INR 60,000 through Amazon.
Amazon credited the INR 60,000 to ABC's account on 1 May 2024, but the customer, Mr. B, made the payment directly to ABC Enterprises on 10 May 2024.
In this scenario, Amazon is required to deduct TDS at 1% (0.1% starting from 1st October 2024) on the INR 60,000 at the time of credit to the participant or when the payment is made, whichever is earlier. Therefore, TDS should be deducted on 1 May 2024.
TDS Rate and Threshold Limit under Section 194O of the Income Tax Act
Specific TDS Rate as per Section 194O
Section 194O of the Income Tax Act has provided for a TDS, that is, a Tax to be Deducted at Source for all those transactions that are so-assisted through e-commerce. The general rate of TDS to be deducted under this section has been pegged at 1% of the gross amount of sale or services assisted by an e-commerce operator.
Transaction Value Threshold Triggering TDS Requirements
It is also very clearly and explicitly provided that the threshold to trigger TDS as per the provisions of Section 194O would be with regard to higher value transactions so that compliance burden is reduced for smaller participants in e-commerce. The TDS is to be applied only in a case where the amount paid or payable to an e-commerce participant exceeds INR 5 Lakh in a financial year.
Here are important points with respect to the threshold:
Annual Threshold: The threshold of INR 5 lakh is an annual threshold, that is, the TDS shall be deducted only if the amount payable to an e-commerce participant exceeds this threshold in the previous year.
Multiple transactions: In case one is an e-commerce operator and is involved with too many transactions, then the cumulative payment made by him to any participant in a year must be monitored for managing compliance when the amount reaches threshold levels.
Exemption for Lower Amounts: If total payments to an e-commerce participant do not exceed INR 5 lakh in a financial year, the operator is not required to deduct TDS for those payments under Section 194O.
PAN/Aadhaar Requirement: Another pre-condition for applicability of the TDS deduction at the prescribed rates would be the e-commerce participant furnishing his PAN or Aadhaar. In case there is no such details provided by the participant, the TDS rate can be higher and at the discretion given by the Income Tax Act.
Compliance Requirements for E-Commerce Operators
As an e-commerce operator, it becomes very essential to comply with Section 194O of the Income Tax Act to avoid any legal implications and penalties. In this context, detailed steps and documentation requirements to be complied with by an e-commerce operator for compliance with the provisions under Section 194O are stated as under:
Detailed compliance steps
Identify applicable transactions: Identify the transactions covered under TDS under Section 194O. Normally, this would cover all transactions where any payment is to be made to an e-commerce participant for sale of goods/services through e-commerce.
Threshold Monitoring of Payments: Monitor all payments to be made to every e-commerce participant. Now, TDS would be required to be deducted only when the payments made to an e-commerce participant exceed INR 5 Lakh in a financial year.
Deduct TDS as Applicable: The moment the threshold is breached, there shall be a deduction of TDS at 1% of the gross amount under the sales or services. While doing so also make sure that the correct TDS rate, as per the furnishing of valid PAN or Aadhaar by participant, is applied.
Timely Deposit of TDS: The TDS deducted shall be deposited with the government by the 7th of the following month. In the case of the month of March, the deposit should be by April 30th.
Provide TDS Statements: File the quarterly TDS return in Form 26Q providing detail of all TDS deductions and deposits made for the purpose of section 194O.
Issue TDS Certificates: Issue TDS certificates in respect of e-Commerce participants is Form 16A within 15 days from the due date of filing the quarterly statement.
Documentation and Reporting Requirements
Transaction Records: Maintain full details of all transactions processed through the platform, which are: the date of transaction, amount thereof, and details of an e-commerce participant should be documented.
PAN/Aadhaar Documentation: Collect and verify details of PAN or Aadhaar of all participants of e-commerce. Its importance is to apply the correct rate of TDS for an exact reporting in TDS returns.
TDS Records: The above-stated TDS deductions must be properly recorded regarding the amounts and their corresponding dates of deduction and deposit. These would form the basis for audit and compliance checks.
Quarterly TDS Returns: Because all TDS related transactions need to be reflected in the quarterly TDS returns furnished in Form 26Q, prepare and file the same on time without any error.
Annual Information Return: The Income Tax Act requires submitting an information return annually giving information about all transactions in respect of which there is a specified limit.
Impact on E-Commerce Participants
Section 194O of the Income Tax Act causes a huge impact on the sellers or service providers who do their business through e-commerce platforms. Impact of Section 194O on E-Commerce Participant are as follows:
Reduction in Receivable Income: With the TDS provision, the immediate reduction in the income of e-commerce players by 1% is like taking away immediate cash in hand from their sales or services which, in turn, can affect liquidity, in case the margins of participants are thin.
Tax Compliance: Though the TDS deduction is to be looked after by the e-commerce operators, it is equally essential for the participants to furnish all necessary documentation relating to PAN or otherwise through Aadhar so that TDS may not be deducted at a higher rate. Proper documentation ensures correct application for TDS and easier filing of taxes.
Tax Liability Management: The TDS deducted is almost like a prepayment against the annual tax liability of the participant, which can actually prove to be beneficial. Since it reduces the lump sum that participants need to pay at the end of the financial year, thus helping better in tax planning and budgeting.
Need for Proper Financial Tracking: Participants will have to carefully account for the income as well as the TDS deductions so as to correctly declare the income and claim the credits for the TDS while filing the income tax returns.
Challenges and Solutions pertaining to Section 194O: TDS on Payment to E-Commerce Operator
The new provision of the Income Tax Act, Section 194O, leads to some challenges that e-commerce platforms will handle. It provides that a platform must deduct TDS on payments to e-commerce participants. The attached are a few common challenges, practical solutions, and tips for compliance at play.
Challenges E-commerce Platforms Face
Complexity in Tracking Payments:
Challenge: Most of the e-commerce websites have to handle enormous transactions every day. This, therefore, becomes easy to keep track of payments by individuals to know whether they have reached the threshold to have TDS deducted.
Solution: Verification and implementation of good accounting software which should have the ability to handle and also automate TDS deduction. These software are responsible for keeping a record of cumulative payments to individual sellers. Once the threshold is reached, TDS is automatically deducted.
Managing compliance across Different Sellers:
Challenge: An e-commerce company offers a platform to a really large number of sellers: simple artisans to big enterprises, with all kinds of tax statuses and compliance requirements.
Solution: If all sellers are forced to go through proper onboarding, which involves filing the required tax information on their end, for instance, PAN or Aadhar; the set-up also makes sure they update their information on a regular basis. Then online systems would categorize them according to the tax profiles they have for appropriate TDS deduction.
Ensuring Compliance with Updated Tax Regulations:
Challenge: Tax laws and rates, inclusive of those related to TDS, tend to change frequently, making compliance a moving target.
Solution: Subscribe to the latest taxation rules from the Income-tax Department and various tax consultancy firms. Periodic training sessions should be conducted for the finance and compliance teams.
Seller Query and Dispute Management
Challenge: Sellers have a wrong understanding of the TDS deductions, leading to disputes and dissatisfaction.
Solution: Prepare detailed FAQs and information content in connection with the various provisions under TDS on the platform’s seller portal. Also, establish a certain helpline or support team well versed with taxation matters to help the sellers clarify their issues.
FAQ
Q1. What is Section 194O?
E-commerce operators are required to withhold TDS on any payment to e-commerce participants or sellers for sale of goods or services made through the operator's platform, Section 194O of Income Tax Act.
Q2. Who is deemed to be an e-commerce operator for the purpose of Section 194O?
A person who owns, operates or manages a digital or electronic facility or platform for the purpose of operation of e-commerce is termed as an e-commerce operator.
Q3. What is the rate of TDS applicable under Section 194O?
The rate of TDS under Section 194O is 1% of the gross amount of sales or services payable to e-commerce participants.
Q4. Does the threshold limit apply for deduction of TDS under Section 194O?
TDS is only deducted if the gross amount of sale or services provided by e-commerce participants through that platform exceeds INR 5 lakh in a financial year.
Q5. Are all participants in e-commerce liable to TDS under section 194O?
TDS under Section 194O is applicable for a resident assessee whose sales are in excess of the threshold limit of INR 5 lakhs during the financial year.
Q6. What if an e-commerce participant does not provide a PAN or Aadhaar number?
If the e-commerce participant is not giving his PAN or Aadhaar, the provisions of the Income Tax Act would charge a higher rate for TDS at 5%.
Q7. Does Section 194O apply to non-resident e-commerce participants?
No. Section 194O is only applicable in case of payment to resident e-commerce participants. In case of non residents, separate sections would apply for taxation of income of such a person.
Q8. How are e-commerce operators to report TDS deducted under Section 194O?
An e-commerce operator is required to file quarterly returns of TDS in Form 26Q and is also required to issue the TDS certificate to e-commerce participants in Form 16A.
Q9. Can e-commerce participants claim credit for TDS deducted under Section 194O?
Yes, e-commerce participants can claim credit for the TDS deducted by the e-commerce operator while filing their income tax returns.
Q10. What would be the steps that an e-commerce participant would be required to take in case more than a reasonable amount of TDS gets deducted?
The e-commerce participant can claim a return of the excess amount while filing his income tax return, or he could adjust against his future tax liabilities.
Q11. Does Section 194O apply to all types of sales and services conducted through e-commerce platforms?
Yes, Section 194O applies to both sales of goods and provision of services facilitated through an e-commerce platform. This includes all transactions made through the digital or electronic platform by the e-commerce participants.
Q12. Is TDS under Section 194O applicable even if the e-commerce operator only facilitates the payment and does not directly process the transaction?
Yes, TDS under Section 194O applies even if the e-commerce operator only facilitates the payment process between the buyer and the e-commerce participant. The operator must deduct TDS on the gross amount payable to the participant.
Q13. Is there any TDS exemption under Section 194O for small businesses selling on e-commerce platforms?
Yes, if the gross sales or services provided by the e-commerce participant do not exceed INR 5 lakh during the financial year, no TDS is required to be deducted by the e-commerce operator under Section 194O.
Q14. What happens if the e-commerce operator fails to deduct TDS under Section 194O?
If the e-commerce operator fails to deduct TDS under Section 194O, they may be subject to interest and penalties. The operator is liable to pay interest at 1% per month for non-deduction and 1.5% per month for non-deposit of TDS, along with penalties under the Income Tax Act.
Q15. Can e-commerce participants avoid TDS under Section 194O by receiving payments directly from the buyer?
No, TDS under Section 194O is applicable regardless of how the payment is made, as long as the transaction is facilitated through the e-commerce platform. The operator is required to deduct TDS, even if payments are made directly between the buyer and the seller.
Q16. Are payments made for advertisements or promotional services on e-commerce platforms subject to TDS under Section 194O?
No, Section 194O specifically covers payments for the sale of goods or provision of services. Payments for advertisements or promotional services are covered under other provisions, such as Section 194C or Section 194J, depending on the nature of the service.
Q17. How does Section 194O affect the tax liability of small sellers on e-commerce platforms?
Small sellers earning less than INR 5 lakh through e-commerce platforms are exempt from TDS under Section 194O. However, sellers earning more than INR 5 lakh will have TDS deducted at 1%, which can be claimed as credit when filing their tax returns.
Q18. Does Section 194O apply to payments made by buyers directly to the e-commerce platform as commission?
No, payments made by buyers directly to the e-commerce platform as commission are not subject to TDS under Section 194O. Such payments are usually subject to TDS under Section 194H, which governs commission and brokerage payments.
Q19. Are refunds and cancellations considered when calculating the INR 5 lakh threshold under Section 194O?
Yes, refunds and cancellations can affect the calculation of the INR 5 lakh threshold. The e-commerce operator must ensure that the net amount after refunds and cancellations is considered for TDS purposes.
Q20. Does Section 194O apply to foreign e-commerce operators facilitating sales in India?
Yes, Section 194O applies to foreign e-commerce operators if they are facilitating sales or services provided by resident e-commerce participants in India. These operators must comply with TDS provisions for transactions involving Indian residents.
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