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Section 194O TDS on e-commerce operators

What is section 194O

An e-Commerce operator is liable to deduct TDS following Section 194O whenever they facilitate a sale of products or render services via an e-commerce participant. The Union Budget 2020 now includes Section 194O of Income tax Act. 

E-commerce providers apply TDS to participants’ gross sales, which guarantees a seller’s credit amount will have a TDS of 1% taken out of it. This ensures that taxes are imposed on these platforms, which was not the case previously.

Who Are E-commerce Operators and Participants?

E-commerce operators

An electronic/digital facility is owned, run, or managed by an e-commerce operator. It makes it easier for people to buy and sell things on his site—only an operator makes overseas payments to online merchants.

E-commerce participants

A participant in e-commerce uses e-commerce platforms to offer his products and services. The individual needs to live in India.

Scope of Section 194O

When crediting the amount of a sale of products, services, or both to an e-commerce participant’s account or when paying an e-commerce participant by any other method, whichever occurs first, e-commerce operators must deduct TDS @1%.

  • A local person or HUF participating in e-commerce

Suppose the gross revenue from sales of products, services, or both during the previous year was Rs 5 lakh, and the e-Commerce participant has provided his PAN or Aadhaar. In that case, the e-commerce operator is not required to deduct TDS.

According to Section 206AA, TDS must be withheld at a rate of 5% if the e-Commerce participant fails to provide his PAN or Aadhaar.

  • Being a non-resident participant in e-commerce

An e-Commerce participant must reside in India, as previously mentioned. And, if the participant is a non-resident, no TDS will be taken.

For instance, a private company ABC (a participant in e-commerce), sells its goods on Amazon (an e-commerce operator). On October 1, 2022, Mr X purchased this item from ABC via the internet for Rs. 50,000.

Although the buyer paid ABC directly on October 15, 2022, Amazon credited ABC’s account on October 1, 2022.

In this case, Amazon must withhold TDS @ 1% on Rs 50,000 at the time of credit to the party or payment, whichever comes first. In this situation, TDS must be taken out on October 1, 2022.

The purpose behind section 194O of Income Tax Act

By including participants in e-Commerce under the tax’s scope, Section 194O’s implementation aims to increase the TDS base.

Customers now prefer using digital platforms to buy or sell goods and services because:

  • From the vendors’ viewpoint, it costs less to put up the setup and takes less time to find customers.
  • From the buyer’s viewpoint, many possibilities are available on one platform, making product comparison quite simple.Over time, this has led to a rise in the number of people using e-Commerce. 
  • Small sellers (e-Commerce participants) who need help filing their income tax returns are tough to track down. As a result, the government has expanded the tax base to include these e-Commerce participants.

Exceptions under section 194O

These are a few exceptions listed in section 194O which are:

  • Non-resident e-commerce participants are exempted from the provisions of section 194O.
  • The only groups subject to a minimum ceiling of 5 lakhs are native people and Hindu Undivided Families. Therefore, an e-commerce company is exempted from deducting TDS if the amount charged to or paid to individuals or HUF in a fiscal year does not exceed 5 lakhs.

FAQs on section 194o

According to Section 194O of the Income Tax Act of 1961, who is liable for TDS deductions?

Anyone who uses a digital or electronic facility or platform to facilitate the selling of goods or the delivery of services by an E-commerce participant is liable.

What is the TDS deduction point under Section 194O?

When money is credited to an e-commerce participant's account for sales, services, or both, or when it is paid to that participant by whatever means, tax should be subtracted, depending on which occurs first.

What is the required TDS deduction rate under Section 194O?

On the gross amount of sales, services, or both, TDS must be subtracted at 1% (0.75% was only from 14 May 2020 to 31 March 2021).

When is TDS under Section 194O not deductible?

If the gross amount of the sale, service or both during the previous year did not exceed 5 lakh rupees and the e-commerce participant provided the e-commerce operator with their Permanent Account Number or Aadhaar number, then no TDS is required to be deducted.

How do I submit a 194O TDS claim?

The e-commerce operator deducts TDS at a rate of 1% from payments made to participants. The operator issues Form 16A to the seller and files a tax return using Form 26Q.

What does LDC mean for TDS 194O?

Lower Deduction of Taxes (LDC) balances an assessee's working capital and protects him from the negative impacts of a larger TDS deduction. Holders of LDC certificates receive lower TDS deduction rates and refunds on more significant tax deductions.

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