Section 194O – TDS on Payments Made to e-commerce Participants

Section 194O, introduced in the Union Budget 2020, necessitates e-Commerce operators to deduct TDS for any goods sale or services provided via an e-Commerce participant. This section's implementation began on 1 October 2020.

What is e-Commerce?

E-Commerce Operator
This is someone who runs an online platform for selling goods or services, and is in charge of payments. 

E-Commerce Participant
This refers to someone who sells products or services online via a platform provided by an e-Commerce operator. This person must live in India. 

Section 194O Scope

E-Commerce operators are required to deduct TDS @1% during credit or payment to the e-commerce participant. 

Resident individual or HUF e-commerce participant
No TDS deduction is required if the annual gross amount from the sale of goods or services doesn't exceed Rs 5 lakh, provided the participant has submitted his PAN or Aadhaar. 

If the participant doesn't submit his PAN or Aadhaar, a 5% TDS deduction is mandatory as per Section 206AA. 

Non-resident e-commerce participantAs mentioned, an e-Commerce participant should be an Indian resident. Therefore, TDS will not be deducted for non-residents.

For instance, company XYZ sells products on Flipkart. A customer buys a product for Rs 50,000 on 1 October 2020.

Flipkart adds the money to XYZ's account on the same day, with the customer paying XYZ directly on 15 October 2020.

Flipkart must deduct 1% TDS on Rs 50,000 at the time of either payment or credit, whichever comes first. Hence, TDS should be deducted on 1 October 2020.

Section 194O Objective

Section 194O was introduced to expand the TDS base to include e-Commerce participants. This is due to the increasing trend of customers using digital platforms for transactions: 

Sellers’ ViewpointSetting up is less costly and finding buyers is easier.

For buyers
Multiple choices are provided on one platform, making product comparison simple.
Due to this, e-Commerce users have grown. Identifying small sellers not filing tax returns is challenging. Therefore, the government has expanded the tax base to include these e-Commerce participants.

Section 194O Exceptions

• Non-resident e-Commerce participants are not covered by this section.
• e-Commerce operators do not need to deduct TDS if payments to individuals/HUF in a financial year are below Rs 5 lakh.

Previous Law

Prior to Section 194O, payments made to e-Commerce participants were not subject to tax deduction. It was up to these participants to file their own taxes, a responsibility often neglected by smaller entities, leading to tax evasion. 

Conclusion

With Section 194O, the government expects increased revenue through reduced tax evasion.

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