E-commerce firms were exempt from TDS deduction in India until 2020. As online stores grow, keeping track of their taxes becomes more important for the authorities. Section 194O of the Income Tax Act makes various digital services taxable.
Section 194O under the Union Budget 2020 came into force on October 1, 2020. It broadens the TDS base and puts e-commerce players under relevant tax regulations.
What Is Section 194O Of The Income Tax Act?
Section 194O requires e-commerce providers to withhold TDS from participants’ gross sales amounts. It ensures that 1% TDS is taken from a seller’s credit amount. This condition applies to selling products or the supply of services by a participant supported via an online marketplace.
During credit, the operator of the digital facility makes a tax deduction, regardless of the mode of payment used. As a result of Section 194O, taxes are now being collected directly from e-commerce platforms, which was not the case earlier.
Who Are The Participants And Operators In E-Commerce?
Here are participants and operators in eCommerce as defined under Section 194O of the Income Tax Act:
- E-commerce Participants: They offer products and services via online marketplaces.
- E-commerce Operators: They may own, run, or manage a digital or electronic facility. Such a facility may also be operated. It makes selling products and services on their platform far less complicated. This operator is solely responsible for making payments to online retailers and merchants.
What Is The Purpose Of Section 194O?
The major goal of this section is to bring e-commerce participants within the jurisdiction of the Income Tax Act. Recently, there has been an upsurge in the preference for digital marketplaces over physical markets. This makes it difficult to detect small merchants and tax evaders active on online platforms.
The following are some of the factors driving development in eCommerce: –
From The Buyer’s Point Of View
- Product comparison is simplified.
- On a single platform, there are several options.
From The Seller’s Point Of View
- Provides effortless buyer search.
- Business setup is cost-effective.
Who Should Pay Tax Under Section 194O?
This legislation requires e-commerce participants to pay taxes imposed by the IT department beginning on October 1, 2020. During payment to the participant, every e-commerce operator shall withhold TDS for any transactions completed using the electronic platform.
A participant is responsible for TDS deduction if the total selling amount in the previous year had exceeded ₹5 Lakhs or if they fail to provide Aadhaar and PAN.
As an example:
Assume you are an Amazon-registered vendor. In a fiscal year, your gross sales are ₹5,20,000 (18% GST included). Section 194O requires Amazon to deduct 1% TDS from your total sales. The formula is as follows:
|Applicable TDS from the gross sales||1%|
|Gross sale||₹5,20,000 (18% GST included)|
|TDS (1 percent of ₹ 5,20,000)||₹ 5,200|
The amount should be deducted at credit fulfilment, and Amazon should submit a TDS return using Form 26Q and send you Form 16A.
What Does Section 194O Cover?
A digital facilitator deducts a 1% TDS at the moment of credit fulfilment or payment to the participant, whichever comes first.
- In the case of a Non-Resident Indian – It is not possible to deduct taxes at the source from income earned by a person who is not a resident of India.
- If an eCommerce participant is a resident of India or a HUF – TDS is not levied if a participant’s total sales during the previous year were less than ₹5,000. Furthermore, Aadhaar and PAN must be provided, or a 5% TDS deduction would be applied under Section 206AA.
Given the e-commerce participants were not subject to any tax legislation, many minor participants avoided paying taxes. Section 194O of the Income Tax Act is in place to ensure that taxes are appropriately paid to the IT department by e-commerce participants. Furthermore, this part has the potential to improve the government’s income. It lowers tax avoidance by subjecting small to major e-commerce players to IT legislation.
Penalties Related To Section 194O
The e-commerce operator will be subject to the penalties that are detailed here, if they fail to report and submit the TDS as required:
- The interest rate of 1.5% per month for non-payment of TDS by the 7th of every month.
- The interest rate of 1% per month for non-deduction of TDS.
- ₹200 every day for non-filing of TDS returns every quarter.
Exceptions To Section 194O
- Only resident persons and HUFs have a restriction of ₹5 Lakhs. As a result, an e-Commerce operator is exempt from deducting TDS provided the amount paid or credited to HUF/individuals within a fiscal year does not exceed ₹5 Lakhs.
- This section does not apply to non-resident e-Commerce participants.
In the past, no TDS applied to payments made to anyone who participated in online transactions. They were instead required to file their income tax returns. As a result, many small e-Commerce participants failed to submit their income tax returns and so avoided tax responsibility. The implementation of Section 194O will boost income for the government by eliminating tax evasion and levying TDS.
What is the LDC for TDS in 194O?
LDC (Lower Deduction of Taxes) balances an assessee’s working capital and shields him from the impacts of a larger TDS deduction. TDS is deducted at a lesser rate for LDC certificate holders, and larger tax deductions are refunded.
How can I claim 194O TDS?
The TDS is deducted at a rate of 1% from any payments made to participants by the online marketplace operator. The operator is the one who submits Form 26Q, and the seller is the one who gets Form 16A.
What is meant by e-commerce service?
E-Commerce service refers to buying and selling products or services through the internet. E-commerce is often connected with the online selling of physical things, although it refers to any economic trade aided by electronic or digital networks.
What does TDS on e-commerce transactions imply?
TDS (Tax deducted at source) on e-commerce transactions is described in Section 194O as a percentage of total sales that the e-commerce operator is obligated to withhold and submit to the Government.
What is meant by e-commerce participants?
An e-commerce participant offers products or services via an e-commerce operator on a digital platform.
What is the meaning of an e-commerce operator?
An e-commerce operator administers, owns, or runs a digital or electronic platform for electronic commerce, such as Amazon.
Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 4+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.