Section 194O – TDS on payments made to e-commerce participants

Section 194O was introduced in the Union Budget 2020. Under Section 194O, an e-commerce operator is required to deduct TDS for facilitating sale of goods or supply of services through an e-commerce participant. TDS for e-commerce operators under Section 194-O is applicable from October 1, 2020.

Who are the e-commerce operators and participants?

E-commerce operator
An e-commerce operator is a person who owns, operates or manages a digital/electronic outlet for the sale of goods and services. He or she is responsible for making payments to an e-commerce participant in connection with such sales.

E-commerce participant
An e-commerce participant is a person who sells goods, services or both through an electronic service provided by an e-commerce operator. He must be a resident of India.

Scope of section 194O

E-commerce operators are required to deduct a withholding tax of 1% from the gross value of the sale of goods, provision of services or both made by an e-commerce participant on the platform provided by e-commerce operators.

E-commerce participant who is an individual or HUF resident
E-commerce entities are not required to deduct tax at source (TDS) if the gross amount of sale of goods, services or both during the previous year does not exceed Rs 5 lakh and if the e-commerce participant has furnished his PAN or Aadhaar number.

If the e-commerce participant does not provide PAN or Aadhaar number, tax at source (TDS) has to be deducted at the rate of 5% as per the provisions of Section 206AA.

Non-resident e-commerce participant
As mentioned earlier, the e-commerce participant must be a resident of India. So, TDS will not be deducted if the participant is a non-resident.

For example, Company XYZ (an e-commerce participant) sells its products through Flipkart (an e-commerce operator). Mr. A purchased this product online from XYZ for Rs 50,000 on April 1, 2024.

Flipkart credited the funds to XYZ’s account on April 1, 2024, but the customer made the payment directly to XYZ on April 15, 2024.

In this case, Flipkart is required to deduct TDS @ 1% of Rs 50,000 at the time of crediting the party or making the payment, whichever is earlier. In such a case, TDS has to be deducted on April 1, 2024.

Time of Deduction of TDS under Section 194O

The offsetting occurs when the sale amount of the goods or services, or both, is credited to the e-commerce participant’s account or when it is paid to such e-commerce participant in any manner, whichever is earlier.

Purpose of Section 194O

The purpose of introducing Section 194O is to broaden the TDS base by bringing e-commerce participants under the ambit of tax. Recently, customers are preferring digital platforms for buying or selling goods and services because:

From a sellers perspective
It requires less investment in creating a website and less effort in searching for buyers.

From a buyer’s perspective
Many options are available on one platform, and comparing products becomes very easy.
This has led to an increase in the number of e-commerce users over time. It is difficult to identify small sellers (e-commerce participants) who do not file tax returns. Therefore, the government has expanded the tax base to include such e-commerce participants in the tax base.

Exceptions to section 194O

Non-domestic e-commerce participants are excluded from the scope of this section.
The maximum limit of Rs 5 lakh is fixed only for resident individuals and HUFs. So, the e-commerce operator is not liable to deduct TDS if the amount paid or credited to individuals/HUFs during the tax year does not exceed Rs 5 lakh.

Law before section 194O

Previously, there were no tax deductions for payments made to e-commerce participants. They had to file their own tax returns. Therefore, many small e-commerce participants did not file tax returns and avoided tax liability.

E-commerce vs OIDAR

Details	E-commerce	OIDAR
Meaning	Electronic commerce, also known as e-commerce or internet commerce, is the buying and selling of goods or services over the internet and the transfer of money and data to complete these transactions.	Online information database access and retrieval services (hereinafter referred to as OIDAR) constitute a category of services provided via the Internet and received by the recipient online, without the need to have any physical interface with the provider of such services.
Nature	E-commerce provides a platform where others can sell and buy goods,	OIDAR, however, deals exclusively with services.

Application

The inclusion of Section 194O in the Income Tax Act in India is a significant step forward to regulate tax compliance in the e-commerce industry. Earlier, there were no rules regarding tax deductions on payments made to e-commerce participants, allowing them to avoid tax liabilities.

As the e-commerce market in India continues to grow, it is imperative for all stakeholders to stay updated with the latest regulations and adhere to government rules.