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

TDS on Online Sellers, Who is required to deduct, how to deduct, TDS Rate, Calculation

In this article, we are going to discuss provisions related to section 194-O. Starting with some basic concepts like who are e-commerce operators, e-commerce participants, etc. Some clarification regarding TDS/TCS concept in relation to e-commerce. Scope of section 194-O, example explaining the concept of provision of section 194-O and exceptions to section 194-O.

In Union budget 2020 a new section 194-O was introduced which is on TDS on payments made to e-commerce participants, effective from 1st April 2020.

[As an update the effective date for applicability of Section 194-O is 1st October 2020 with reduced TDS rate i.e. effective TDS rate for the FY 2020-21 is 3.75%]

tds on payments made to online sellers.

Are you selling goods or services online in any e-commerce market place? or are you intent to sell goods or services in your near future on any e-commerce market place like Amazon, Flipkart, Snapdeal, Limeroad, eBay, Myntra, etc?

Then I guess you are at the right place to know how things go around in any of the e-commerce portals.

Related: How to deal with Amazon Form 16A – TDS Certificate u/s 194-O

“Some interesting facts which might need your attention being an online seller”.

To begin with, we have to understand some concepts which will help us to understand what exactly Section 194-O is all about.

basic concepts

– Who is an e-commerce operator?

– Who is e-commerce participants?

– What is electronic commerce?

– What is a service as per section 194-O?

  • E-Commerce Operator [ECO]: e-commerce operator [Like Amazon, Zomato, Flipkart, Limeroad, Snapdeal, eBay, etc.] here means any person who owns, manages, or operates any digital platform for the purpose of electronic commerce and is responsible for paying to e-commerce participants [Online sellers].
about e-commerce participants and e-commerce operator
  • E-commerce Participants [ECP]: e-commerce participants [Online sellers] here means any person who is a “RESIDENT” i.e. if an e-commerce participant is a Non-Resident then the provisions of this section will not apply.

Selling goods or providing services or both (goods includes digital products) through any digital platform provided by the e-commerce operator for the purpose of electronic commerce.

electronic commerce and service
  • Electronic commerce: Electronic commerce here means the supply of goods or services or both including any digital products over the digital platform.
  • Service: service here means fees for technical services and fees for professional services.

The definition of Fees for technical services and fees for professional services is the same as defined under section 194J.

Another amendment that was proposed under the Union Budget 2020 was that the applicable TDS rate for fees for technical services is going to be 2%.

Before Union Budget 2020, the applicable TDS rate for such services was 10% in both cases. However, the TDS rate @ 10% is still applicable in case of fees for professional services.

Since the introduction of section 194-O, there is some confusion in the general that if e-commerce operator is going to deduct the tax, then, in that case, we as an online seller are not required to deduct tax at source.

Besides that, the deduction of tax at source is mandatory if the conditions laid down under the relevant sections of the income tax act are satisfied.

Being an online seller it is recommended that you must comply with the provisions of tax deducted at source if it is applicable to you.

TDS vs TCS confusion or/and conflicts?

Now, to understand the concept in-dept we are going to discuss the criteria about the TDS and TCS before Union Budget 2020 and after the introduction of section 194-O in Union Budget 2020.

  • Before Union Budget 2020

Concept of TCS “in relation with e-commerce transactions done on online market place by the e-commerce participants”

TCS under GST means tax collected by an ECO from the consideration received by it on behalf of the suppliers of goods or services who makes supplies through the operator’s online portal.

Deductor: ECO [E-Commerce Operator] e.g. Amazon, Flipkart, Zomato etc.

ECO: Liable to collect tax on the net value of taxable supplies @1% IGST or 0.5%CGST/0.5%SGST.

ECO: The e-commerce operator will deduct the TCS in the month in which supply is made.

Paid by ECO to the credit of the Government within 10 days from the end of the month of supply and file GSTR-8 accordingly.

ECP: ECP will get the credit under GST. [Input available to Online sellers]

For availing the TCS Credit, the online seller has to file TCS/TDS Credit return under GST. Please don’t get confused with the TDS under GST and TDS under Income Tax Act, they both are different concepts with a different applicability.

Want to know more about how e-commerce participants i.e. online sellers can avail the credit of TCS under GST. Click here.

Concept of TDS

As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government.

The deductee from whose income tax has been deducted at source would be entitled to get the credit for the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor.

Deductor: In this case ECP [E-Commerce Participants] e.g. XYZ Private Limited – Online Seller is liable to deduct tax at source on the commission invoices raised by the ECO’s.

Here comes the role of Section 194-H, 194-C, 194-J, 194-I, and other sections of the income tax if applicable.

Online sellers have to deduct the TDS on the commission invoices raised by the ECO’s i.e e-commerce operators like Amazon, Zomato, Flipkart, eBay, etc.

ECP [online sellers]: Liable to deduct TDS on commission invoices raised by the ECO’s if it exceeds the threshold limit specified under section 194-H.

For example under section 194-H – when the commission amount credited or paid or likely to be credited or paid exceeds Rs.15,000/- in a Financial Year, then the online seller is required to deduct TDS at the rate of 5%.

ECP [online sellers]: Deduct the TDS in the month in which it exceeds the threshold limit.

The online seller is required to pay the taxes to the credit of the central government on or before 7 days from the end of the month in which such deduction is made.

Online seller needs to issue Form 16A and delievered it to the ECO’s before the stipulated time period as per the income tax rules.

ECO [Amazon, Zomato, eBay, etc]: ECO will get the credit as per Income Tax Act which will reflect in their Form-26AS.

If you want to know more about TDS under section 194-H which is on TDS on commission or brokerage. Click here.

If you want to know more about TDS under section 194-C which is on TDS on contractors or sub-contractors. Click here.

Some important links in case you are selling on the e-commerce market place provided by these ECO’s:

– Online seller on Amazon.

– Online seller on Pepperfry.

– Online seller on Limeroad.

– Online seller on Flipkart.

    TDS introduced in Union Budget 2020

As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government.

The deductee from whose income tax has been deducted at source would be entitled to get the credit for the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor.

Deductor: ECO [E-Commerce Operator] e.g. Amazon, Flipkart, Zomato etc.

From now onward ECO are also liable to deduct tax at source from 1st April 2020 under section 194-O.

ECO [e-commerce operator] responsible for paying toECP [e-commerce participants]

Deduct tax at source at the rate of 1%.

ECO: Deduct the Income-tax on the Gross amount of such sales or services. Credited or Paid by ECO to ECP.

Point to be noted that TDS calculation would be on the “GROSS AMOUNT”.

ECP: Now ECP [Online sellers] will get the credit as per Income Tax Act – Form 26AS.

Why section 194-O has been introduced in Union Budget 2020.

why this section was introduced

Section 194-O was introduced in Union Budget 2020 in order to widen and deepen the tax net by bringing participants of e-commerce with the tax net.

Tax net usually often refers to the percentage of people out of the total population who are paying direct taxes.

To identify those small traders/sellers [e-commerce participants] who were not filing their income tax return or showing less amount of sales in their income tax return.

Since the amount of TDS is to be calculated on the total amount of sales made, income tax department can easily trace out by reverse calculation what would have been your total sales in the previous financial year.

They can cross check the data with the TDS return filed by the e-commerce operator.

Effective date of implementation of section 194-O is 1st April 2020.

Rate of tax under section 194-O is 1%.

Scope of Section 194-O

scope of section

(a) Who is required to pay TDS under section 194-O?

Its the ECO [e-commerce operator] who has to pay TDS.

(b) When to deduct Income Tax under section 194-O?

•Credit of amount of sale or service or both to the account of e-commerce participants or,

•At the time payment thereof to such participants by any mode

whichever is earlier.

(c) What is the rate of tax under section 194-O?

•Rate of tax under section 194-O is 1% on the gross amount of such sales or service or both.

Section 206-AA will get attracted if, the e-commerce participant does not furnish PAN or Aadhaar to the ECO [e-commerce operator], in that case tax rate would be 5%.

Understanding the provision of section 194-O with the help of an example.

example for understanding the concept.
By CA Devesh Thakur

In out example, we have consider Flipkart as our e-commerce operator, Mr. X as our purchaser or recipient of services and Proprietor Firm ABC as our e-commerce participants.

Mr. X has bought goods from Flipkart on 1st April 2020 of Rs.60,000/-.

Flipkart credited the account of Firm ABC in its books of accounts on 1st April 2020.

Now either Mr. X will pay to Flipkart or if there is any direct payment also from Mr. X to Firm ABC, it Shall be deemed to be amount credited or paid by ECO to ECP i.e. Flipkart to ABC.

It shall be included in the gross amount of such sales Or services for the purpose of deduction of Income Tax

Flipkart is required to deduct TDS @1% on Rs.60,000/- at the time of credit to the party i.e. on 01.04.2020

or making the payment i.e. on 15.04.2020, which ever is earlier

In this case TDS should be deducted on 1st April 2020 by the ECO i.e. Flipkart.

Exception to Sec 194-O

exception to section

Provisions of section 194-O will not be applicable if ECO has credited or paid any sum to ECP (being an Individual or Hindu undivided family) and following conditions satisfied:

(a) If the Gross amount of sales or services or both during the Previous financial year doesn’t exceed Rs.5,00,000/-.

and

(b) ECP (E-Commerce Participant) has furnished his PAN or Aadhaar to ECO (E-Commerce Operator)

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