Understanding the Section-194O – TDS on payments made to E-commerce participants

The Finance Act, 2020 has established a new Section 194-O that elaborates on levying 1% Tax Deducted at Source on Payments made to E-Commerce operators that has been  applicable  from 1st October 2020. In this blog, we will talk about TDS Applicable on payments made to E-commerce operators.

Applicability of Section 194-O

Section 194-O will be applicable on Residents or Non-Resident E-commerce operators making payment to resident e-commerce platform in relation to sale of goods and services consisting of digital products like E-book, blogs, podcasting, audio-video etc. aids through its digital or electronic facility or platform.

Defining 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.

Main objective of Section 194O

The obkective 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.

Who is liable to deduct TDS under Section 194-O?

Any person, holding an e-commerce executive promoting the sale of goods or requirements of services of an e-commerce associate or participant through its digital or automated facility or platform (by whatever name described).

Limitations to Section 194O,

• Non-resident e-commerce participants are excluded/exempted from the horizon of section 194O.
• A threshold limit of Rs. 5 Lacs is mentioned for only resident individuals and HUF. Hence, an e-commerce operator does not need to deduct the TDS if the amount paid or credited to individuals or HUF during the financial year does not go beyond Rs. 5 Lacs.

Scope of TDS on E-commerce Proceedings Under Section 194-O

The idea behind the introduction of the new section is to bring in e-commerce participants within the purview of the tax net, i.e., there will be clarity on the income received by the agent of goods or providers of service over digital platforms. The terms of the section states as under:

• The TDS is to be handled by e-commerce executives for facilitation service of selling provision or goods of service furnished by it through its digital or automated facility or platform. In other terms, the responsibility of payment of TDS lies with an escrow account between the buyer and seller.
• E-commerce executives are expected to deduct TDS at the period of credit or return, whichever is faster. Credit means a credit to the statement of an e-commerce associate. And the payment indicates payment through any method.
• Moreover, this section provides that if a purchaser of goods or service has earned the payment immediately to the e-commerce associate, it shall be assumed that an adjustment has been performed by the e-commerce executive or that the account has been charged by the e-commerce operator and the same shall be calculated in the entire amount for deduction of tax.

Previous Scenario of TDS Applications on Payments made to E-Commerce Operators

Before the introduction of Section 194-O, there was no tax deduction on payments made to any E-Commerce operator. It was mandatory for them to file their income tax return independently. Consequently, many small E-Commerce operators did not file their Income-tax Return and avoided tax liability.

According to Section 194-O, E-commerce operators will deduct TDS @ of 1% on the total amount of sale of goods or services assisted by any E-commerce operators through digital or electronic means to the participants of the E-commerce. The TDS applicable on payments made to E-commerce operators or payment by any mode where the purchaser of goods and services makes payment directly to any e-commerce participants.

Final words

Section 206AA now provides that if PAN or Aadhaar is not available, then tax will be deducted @ 5% instead of 1%. Section 194-O states that when paying GST at the time of credit to the party or making any payment, whichever is earlier then tax will be deducted according to Section 206 AA. Therefore introduction of Section 194O will result in an increase in the revenue by reducing tax evasion for the government. The Finance Act, 2020 has established the new Section 194-O that elaborates on levying 1% TDS applicable on payments made to E-commerce operators.