The Finance Act, 2020 has inserted Section 194-O which elaborates on levying 1% Tax Deducted at Source (TDS) on Payments made to E-Commerce Participants, which will be applicable for the transactions from 1st October 2020 onward.
Section 194-O shall be applicable on Residents and Non-Resident E-commerce operators making payment to resident e-commerce participants in relation to sale of goods or services including digital products like E-book, podcasting, blogs, audio video etc. facilitated through its digital or electronic facility or platform.
Before the insertion of Section 194-O there was no tax deduction on payments made to E-Commerce participants. They were required to independently file their income tax returns. Therefore, many small e-Commerce participants did not file their income tax returns and escaped the tax liability.
An E-Commerce operator is a person who owns, operates, or manages a digital/electronic facility for the sale of goods and services. He is responsible for making payments to the e-Commerce participant on such sales.
An E-commerce operator means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce and is responsible for paying to e-commerce participants, like Flipkart, Amazon, Facebook, Myntra etc.
As per Section 194-O E-commerce operators should deduct TDS at the rate of 1% on the gross amount of sales of goods or services facilitated by e-commerce operators through digital or electronic platform to the participants.
The TDS rate of 1% would apply either at the time of credit to the e-commerce participants or payment by any mode or where the purchaser of goods or services makes payment directly to e-commerce participants.
Further, the TDS under section 194-O is not to be deducted in two cases.
Firstly, an individual or HUF only, where the aggregate gross sale of goods or services or both is not likely to exceed INR 5 Lakhs during the Financial Year; and such person has furnished PAN or an aadhar to the e-commerce operator, the TDS under section 194-O can not be deducted.
Secondly, no TDS can be deducted if any payment which is covered under section 194-O shall not be liable to TDS under any other provision of the Act.
TDS is to be deducted at 1% on the gross amount of sales or services or both.
However, section 206AA now provides that if PAN/Aadhaar is not available, then tax would be deducted at the rate 5% instead of 1% as prescribed in Section 194-O.
For instance, an E-Commerce participant, XYZ Ltd. is selling its product through E-Commerce Operator ACB. Mr. M buys this product online from XYZ Ltd. for Rs.1,18,000/- including GST on 1st October 2020.
ACB credits the account of XYZ Ltd. on 1 October 2020, but the customer makes the payment directly to XYZ Ltd. on 15 October 2020.
Here, ABC is required to deduct TDS at the rate 1% on Rs 1,00,000 excluding GST at the time of credit to the party or making payment, whichever is earlier. In this case, TDS should be deducted on 1 October 2020.
Therefore, introduction of Section 194O will result in an increase in the revenue for the government by reducing tax evasion.
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