Section 194O of Income Tax Act –TDS on E-commerce Participants Explained

The e-commerce businesses were free of tax liability until 2020. As online shops grow in number, keeping a check on their taxes is the need of the hour. Section 194O of the Income Tax Act brings these digital facilities within the tax ambit.

The Union budget 2020 introduced Section 194O with effect from 1st October 2020. It enlarges the TDS base and brings e-commerce participants under the tax laws.

What Is Section 194O of the Income Tax Act?

Under Section 194O, e-commerce operators deduct TDS on participants' gross sale amounts. It ensures a TDS of 1% is deducted from the credit amount of a seller. The sale of goods or provision of services from a participant facilitated by an online marketplace falls under this criteria.

The digital facility operator must deduct tax at source at the time of credit regardless of payment methods. Section 194O under the Financial Act 2020 ensures that taxes are imposed on the e-commerce platform, which was not the case earlier.

Who Are E-commerce Operators and Participants?

E-commerce Operators –An e-commerce operator owns, operates or manages an electronic/digital facility. It facilitates the sale of goods and services on his platform. This operator solely manages the payment to the e-commerce sellers.
E-commerce Participants –An e-commerce participant sells his goods and services on e-commerce platforms. He must be a resident of India.

What Is the Purpose of Section 194O?

The primary purpose is to bring e-commerce participants under the Income Tax Act. The preference for digital markets over physical markets has increased lately. This makes identifying the small sellers and tax evaders very difficult. The reason for growth in the electronic marketplace include –

1. From the Seller’s Perspective

Business setup is cost-effective
Provides effortless buyer search

2. From the Buyer’s Perspective

Lots of choices are available on one platform
Product comparison becomes seamless

Who Has to Pay Tax Under Section 194O?

With effect from 1st October 2020, this act brings the e-commerce participants to pay taxes set by the IT department. In case of any purchases made through the electronic platform, every e-commerce operator should deduct TDS at the time of payment to the participant.

A participant is liable for TDS deduction in case of gross sale amount greater than ₹ 5 lakh or fails to furnish Pan and Aadhaar.

For Example:

Say you are a registered seller (e-commerce participant) on Flipkart (e-commerce operator). Your gross sales in a financial year = ₹ 5,20,000 (18% GST included). According to section 194O, Flipkart should deduct a TDS of 1% from your gross sales. The calculation is as follows:

Particulars	Amount
Gross sale	₹ 5,20,000 (18% GST included)
Applicable TDS from the gross sales	1%
Tax Deducted At Source (1% of ₹ 5,20,000)	₹ 5,200

The amount should be deducted at the time of credit fulfilment and the Flipkart should file a TDS return via Form 26Q and issue Form 16A to you.

What Is the Scope of Section 194O?

A digital facilitator deducts a TDS of 1% at the time of credit fulfilment or making payment to the participant, whichever is early.

If an E-commerce Participant Is a Resident of India or HUF: TDS is excluded if the gross sale amount of a participant during the previous year is below ₹ 5,00,000. Furthermore, Pan and Aadhaar should be furnished or else a deduction of 5% TDS is applicable under Section 206AA.
In Case of the Participant Being a Non-resident of India: If an individual is not a resident of India, tax deduction at source is not applicable.

The e-commerce participants were not under any tax laws and hence filed tax returns independently. This resulted in various small participants evading tax. To ensure taxes are paid properly to the IT department by e-commerce participants, Section 194O of the Income Tax Act is effective.

Moreover, this section can increase the revenue of the Government. It reduces tax evasion by bringing minor to significant e-commerce participants under the IT laws.

Here were all the necessary details of Section 194O of the Income Tax Act. Individuals that this section concerns can go through these data for detailed reference.

Frequently Asked Questions

✓ How do I claim TDS from 194O?

TDS at the rate of 1% is deducted by the e-commerce operator on payments to the participants. Operator files a tax return via Form 26Q, and issues Form 16A to the seller.

✓ What is LDC for TDS under 194O?

LDC (Lower Deduction of Taxes) brings a balance in an assessee’s working capital, and it saves him from higher TDS deduction effects. An LDC certificate holder gets his TDS deducted at lower rates and a refund on higher tax deductions.