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Section 194O of Income Tax Act - TDS on Payments Made to E-commerce

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.

Team Digit

What is Section 194O of the Income Tax Act?
Who are E-commerce Operators and Participants?
Purpose of Section 194O
TDS Rate Calculation
Scope of Section 194O
Frequently Asked Questions

What is Section 194O of the Income Tax Act?

Under Section 194O, e-commerce operators deduct Tax Deducted on Source (TDS) on participants' gross sale amounts. It ensures a fixed TDS 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 these criteria.

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

As per amendments by Budget 2024, the TDS rate under Section 194O has been proposed to be decreased to 0.1% from 1%, with effect from 1st October 2024.

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 of 194O TDS section 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 includes:

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

Section 194O TDS Rate Calculation

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. The applicable rate will be 5% in the latter case as per Section 206AA.

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 0.1% 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	0.1%
TDS rate (0.1% of ₹5,20,000)	₹520

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

What is the Scope of Section 194O?

A digital facilitator deducts a TDS of 0.1% 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.

FAQs about Section 194O of Income Tax Act

All

How do I claim TDS from 194O?

You can claim the TDS while filing your income tax return.

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.

What is the TDS rate Section 194O?

The proposed TDS rate u/s Section 194O is reduced to 0.1% in the Union Budget 2024. If the PAN is not furnished by the e-commerce participant, then TDS is to be deducted @ 5%.

How much amount is exempted under Section 194O?

The exempted limit under Section 194O is ₹5 lakh for an individual or HUF, i.e., the e-commerce operator will no longer be required to deduct the tax deduction at source. Non-resident e-commerce participants are also exempted from this section.

What are the penalties under Section 194O?

TDS has to be filed by the 7th of every month. So, in case an e-commerce operator fails to do so under Section 194O, an interest of 1.5% per month is applicable on the outstanding amount. However, in case an e-commerce participant fails to deduct the TDS amount, an interest of 1% per month is applicable on the TDS amount. Additionally, a penalty of ₹200 per day is applicable.

When is TDS deducted under Section 194O?

Under TDS Section 194O, an e-commerce operator is liable to deduct TDS at the rate of 0.1%, w.e.f 1 October 2024, when the gross sales exceed ₹5 lakh.

What is “gross sales” in Section 190 of Income Tax Act?

E-commerce operator deducts an amount as commission before making payment to the e-commerce participant. So, the gross sale value excluding the commission is called the “gross sales” which is used for deducting TDS.