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What Is Section 194o of the Income Tax Act?

Ever since the internet revolution hit India, e-commerce has found its way into the lives of billions of Indians. But did you know, this vast sector was not taxable under the Income Tax Act until recently? The game-changer was Section 194O, introduced in the Union Budget 2020, which came into effect from October 1, 2020. This new provision expanded the tax deducted at source (TDS) base, finally bringing e-commerce transactions under the ambit of the Income Tax Act. But what exactly is Section 194O? Let's dive in and unravel the details.

What is Section 194O of Income Tax Act?

In a nutshell, Section 194O of the Income Tax Act holds e-commerce operators accountable for deducting TDS at a rate of 1% from the gross amount payable to the seller, or at the time of actual payment, whichever is earlier. This includes any and all transactions that the e-commerce platform facilitates, which range from goods and services to professional and technical offerings. Remember, the TDS deduction occurs at the time of crediting the seller's account, and is unaffected by the mode of payment. This new section, forming part of the Financial Act 2020, imposed tax on e-commerce platforms for the first time.

Who are e-commerce participants and operators?

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What is the purpose of section 194O?

With the objective to widen the TDS base, Section 194O aims to tax e-commerce participants like never before. As digital platforms continue to swarm the market, making buying and selling almost effortless, traditional sellers can bypass setup costs and the hassle of door to door marketing.

Buyers, on the other hand, are treated to a comprehensive range of options, all in one place, armed with the ability to compare products effortlessly.

This convenient structure has resulted in a rapid growth of e-commerce users. However, tracking small sellers (e-commerce participants) who neglect to file their income tax returns proved challenging. Hence, the government expanded the TDS base to include e-commerce participants under the Income Tax Act.

Who is accountable for deducting TDS under section 194O?

With the implementation of Section 194O of Income Tax Act in October 2020, e-commerce operators are now mandated to deduct TDS prior to making payments to participants. Furthermore, participants who fail to provide their Permanent Account Number (PAN) are liable for TDS, if their aggregate sales exceed ₹5 lakh. In such cases, the TDS rate is at 5% as per section 206AA.

What is the scope of section 194O?

Under Section 194O, when e-commerce operators sell goods, services, or both to an e-commerce participant, they must deduct TDS at 1% at the time of crediting the sales amount to the participant's account, or while making the payment, whichever is sooner. Notably, e-commerce participants, being resident individuals or Hindu Undivided Family (HUF), are exempt from TDS if their total sales from goods, services, or both do not exceed Rs 5 lakh in the previous financial year, and they have provided their PAN or Aadhaar details.

If these details are not provided, the TDS will be deducted at 5%, as mentioned in Section 206AA. Note that only resident Indians can be e-Commerce participants, thereby excluding non-residents from this provision.

Exceptions to Section 194O, if any.

Non-resident e-Commerce participants are exempt. An e-Commerce operator is not required to deduct TDS if the total amount paid or credited to resident individuals/HUF does not exceed Rs 5 lakh in a financial year.

Frequently Asked Questions

Q- What is the exempted limit under section 194O?

In Section 194O, an exemption limit of Rs. 5 Lakh is provided for amounts paid to an individual or Hindu Undivided Family (HUF). This indicates that e-commerce operators are not required to deduct TDS if amounts do not exceed this limit. Moreover, non-resident participants of e-commerce are also exempted from this section.

Q- What was the procedure for deducting TDS before section 194O came into effect?

Before the inception of section 194O, there was no provision for TDS for e-commerce participants in the Income Tax Act. Instead, participants had to shoulder the responsibility of filing their Income Tax Returns (ITR) independently. This state of affairs often led to many smaller entities in the vast e-commerce landscape falling through the cracks of the tax system, subsequently avoiding their tax liabilities.

Q- Wondering how to claim TDS under section 194O?

Great! Here's what you should know. If you're an e-commerce operator, you'll need to file your Income Tax Return (ITR) using Form 26Q. Additionally, you'll be issued Form 16A. Once you have these two important documents, you can easily claim your Tax Deducted at Source (TDS) under the section 194O of the Income Tax Act. Now isn't that simpler than you thought?

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The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

Frequently Asked Questions

What is the Lower Deduction of Taxes (LDC) for TDS under section 194O? LDC helps maintain a balance in the working capital of the assessee and prevents excessive TDS deductions.

 

Section 194 of the Income-tax Act requires the principal officers of an Indian company, who have arranged for declaring or paying deemed dividends in India, to deduct tax at source at a predetermined rate before remitting the dividend amount to the shareholder.

According to section 194O of the Income Tax Act, all registered e-commerce operators in India must deduct a TDS of 1% (0.75% for the Financial Year 2021 until March 31, 2021) from the total amount received from the sale of products or services on their online platforms.

 

Individual residents or Hindu Undivided Family (HUF) e-commerce sellers will have a 1% TDS deducted from their total sales if it exceeds Rs. 5,00,000 in a financial year.

Section 194 covers tax deductions on income from dividend stocks. This article explains the meaning of this section, including the tax rate, exceptions, and applicability. The tax deduction rate for dividend income under this section is 10%.

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