Section 194O – E-commerce Operator Payments

Introduction to Section 194O

Section 194O was introduced into the Income Tax Act, 1961, by the Finance Act 2020, with effect from October 1, 2020. This section aims to bring transactions facilitated by e-commerce operators within the ambit of Tax Deducted at Source (TDS). With the rapid growth of the e-commerce sector, this provision ensures that tax is collected at the source from the income generated by e-commerce participants (sellers of goods or providers of services) through online platforms.

The primary objective is to widen the tax base, enhance transparency, and facilitate ease of tax collection from digital transactions that might otherwise be difficult to track.

Who is the Deductor?

Under Section 194O, the E-commerce Operator is responsible for deducting tax. An e-commerce operator is defined as a person who owns, operates, or manages a digital or electronic facility or platform for e-commerce, and is responsible for making payment to an e-commerce participant.

Who is the Deductee?

The tax is to be deducted from the payments made to an E-commerce Participant. An e-commerce participant is defined as a person selling goods or providing services or both, including digital products, through an e-commerce operator.

It's important to note that this section primarily applies to resident e-commerce participants. Non-resident e-commerce participants are generally excluded from the purview of this provision, and their transactions might be covered under other TDS provisions like Section 195, if applicable.

Nature of Payment Covered

Section 194O mandates TDS on the gross amount of such sale of goods or provision of services or both facilitated through its digital or electronic facility or platform by an e-commerce operator. This includes amounts paid directly by the buyer to the participant and collected by the operator, or payments made directly by the operator to the participant.

For clarification, the "gross amount" includes all charges such as shipping fees, packaging fees, and convenience fees if they are part of the total transaction value. However, if GST or any other indirect tax is separately indicated in the invoice and TDS is deducted at the time of credit, such taxes generally do not form part of the "gross amount" for TDS calculation. If TDS is deducted at the time of payment (which is earlier than credit), then it should be on the gross amount including GST.

TDS Rate under Section 194O

The standard TDS rate under Section 194O has seen a recent update:

• For transactions before October 1, 2024: The TDS rate is 1%.
• For transactions on or after October 1, 2024: The TDS rate is 0.1% (as per Budget 2024 proposals).

If the e-commerce participant fails to furnish their Permanent Account Number (PAN) or Aadhaar number to the e-commerce operator, a higher TDS rate of 5% will be applicable as per Section 206AA. Additionally, Section 206AB may apply a higher TDS rate for specified non-filers.

Threshold Limit for Deduction

There is a specific threshold exemption under Section 194O:

• For Individual or Hindu Undivided Family (HUF) e-commerce participants, no TDS is required if the gross amount of sales or services during the previous year does not exceed ₹5 Lakhs, provided they have furnished their PAN or Aadhaar number to the e-commerce operator.
• For all other e-commerce participants (e.g., companies, firms, LLPs), TDS applies regardless of the transaction amount; there is no threshold limit.

Time of Deduction

The e-commerce operator is required to deduct tax at the time of:

• Credit of the amount of sale or service or both to the account of the e-commerce participant, OR
• Payment by any mode (e.g., cash, cheque, draft, or any other electronic mode) to the e-commerce participant,

Whichever is earlier.

Interplay with Other TDS Sections

A significant provision of Section 194O is its overriding effect. If a transaction is subject to TDS under Section 194O, then it will not be liable for TDS under any other section of the Income Tax Act (e.g., Section 194C for contractors or Section 194J for professional fees), even if it otherwise falls under those provisions. This avoids double deduction of tax on the same transaction.

Compliance Requirements for E-commerce Operators

E-commerce operators must adhere to the following compliance norms:

• Tax Deduction and Collection Account Number (TAN): The operator must possess a valid TAN to deduct and deposit TDS.
• TDS Deposit: The deducted TDS must be deposited with the Government by the 7th of the following month in which the deduction is made (or by April 30th for TDS deducted in March).
• TDS Return Filing: Quarterly TDS returns must be filed by the e-commerce operator in Form 26Q.
• Issuance of TDS Certificate: The e-commerce operator must issue a TDS certificate in Form 16A to the e-commerce participant within 15 days from the due date of filing the quarterly statement.
• PAN/Aadhaar Requirement: Ensure that e-commerce participants provide their valid PAN or Aadhaar to avoid higher TDS rates as per Section 206AA and Section 206AB (for non-filers).

Impact on E-commerce Participants

E-commerce participants whose tax has been deducted under Section 194O can claim credit for this TDS while filing their Income Tax Returns. It is crucial for participants to reconcile the TDS deducted by the operator with their Form 26AS to ensure that the correct tax credit is reflected.

Conclusion

Section 194O plays a pivotal role in regulating the tax compliance within India's burgeoning e-commerce ecosystem. It places the onus of tax deduction on the e-commerce operator, streamlining the process of tax collection and ensuring that income generated through online platforms is adequately brought under the tax net. Both operators and participants must understand its provisions to ensure seamless compliance and avoid penalties.