Section 194O of the Income Tax Act: Meaning, Exceptions And TDS Deductions
The Union Budget 2020 has introduced Section 194O to the Income Tax Act, 1961. As per the provisions of this section, e-commerce operators can deduct TDS (Tax Deducted at Source) for providing any service or conducting the sale of goods via e-commerce participants. It is in force from October 1, 2020.
Keep reading to know how this section works!
About E-Commerce Participants and Operators
Section 194O involves the following two parties:
- e-commerce participant
An e-commerce participant refers to an individual who engages in the sale of services, goods or both via an electronic facility that an e-commerce operator provides.
- e-commerce operator
An e-commerce operator refers to an individual who manages, operates and owns an electronic or a digital facility to conduct the sale of services and goods.
Scope of Section 194O
An e-commerce operator must deduct TDS at the rate of 1% during the credit of the sale amount (can be the sale of services, goods or both) to an e-commerce participant’s account or while making payment (through other modes) to the e-commerce participant, whichever is earlier.
Here are some of the different instances and the respective TDS deduction that would occur as per Section 194O:
- When an e-commerce participant is a HUF or a resident individual
An e-commerce operator need not subtract TDS if an e-commerce participant has provided his/her Aadhaar or PAN details and the gross sale amount in the last year doesn’t go above Rs. 5,00,000.
- When an e-commerce participant is a non-resident individual
TDS deduction is not applicable for non-resident participants. An e-commerce participant should be a resident individual.
Also Read: How To Use Challan 280 To File Income Tax?
Exceptions under Section 194O
Following are the exceptions applicable to this section:
- A Rs. 5 lakh limit has been set for HUF and resident individuals. Hence, e-commerce operators need not subtract TDS if the sum, credited or paid to HUF/individuals in a fiscal year, doesn’t cross Rs. 5 lakh.
- This section has exempted e-commerce participants who are non-resident individuals.
Illustration of TDS Deduction under Section 194O
Understand the mechanism of TDS deduction as per this section through the following example:
Suppose Rajiv is an e-commerce seller of an eminent e-commerce operator. The details of his sales are as follows:
Gross sales = Rs. 6,00,000
The e-commerce operator’s commission stands at 2.90%, amounting to Rs. 17,400.
18% GST in the sales amounts to Rs. 108,000.
Therefore, TDS = 1% x Rs. 6,00,000 = Rs. 6,000. Now, his e-commerce operator needs to:
- Subtract Rs. 6,000 as TDS while making payment or during credit fulfilment, whichever is earlier
- File Tax Deducted at Source (TDS) return through Form 26Q
- Issue Form 16A to Rajiv
If Rajiv doesn’t furnish his Aadhaar or PAN details, then TDS must be subtracted at the rate of 5% regardless of the amount of gross sales.
Reason for Introducing Section 194O
Prior to the introduction of Section 194O of the Income Tax Act, there was no TDS deduction for the payments towards the e-commerce participants. Further, they had to place their income tax returns individually. As a result, several minor e-commerce participants evaded taxes and didn’t publish their tax returns.
Previously, it was not clear how much the sellers of goods or service providers earn through digital platforms. So, the reason to launch this new section is to include the e-commerce participants under the scope of taxation.
At present, consumers prefer online platforms for selling or buying services and goods because:
- A single platform offers multiple options and it becomes easy to compare the products. This has led to a rise in the count of e-commerce participants over the years.
- The setup creation for an online seller involves lower expenses and purchasers can search them without much effort.
It was quite challenging for the government to recognise small e-commerce sellers who did not file ITRs correctly. Hence, the Government of India has expanded its tax base to include e-commerce participants.
Also Read: How To Calculate Income Tax In Excel?
Final Word
Section 194O of the Income Tax Act helps minimise tax evasion and increase the government’s revenue. If you are planning to sell goods or services through an e-commerce platform, make sure that you are aware of the provisions of Section 194O.
Frequently Asked Questions
1. How do I claim TDS deducted by e-commerce?
An e-commerce operator will issue a form, namely Form 16A, to an e-commerce participant. The seller can use this form to claim the credit of TDS at the time of filing his/her income tax returns.
2. What is LDC for TDS under Section 194O?
If your income tax liability for a year is lower than the TDS applicable on a specific source of income, you can ask for lowering the TDS rate. For this you have to apply for a LDC via Form 13 to the Assessing Officer.
3. At what rate does TDS has to be deducted u/s 194O?
Under Section 194O, an e-commerce operator will deduct TDS @1% on the gross sales. In case a deductee has failed to furnish his/her Aadhaar or PAN details, the rate of TDS deduction will be 5% regardless of gross sales amount.
4. Under what circumstances TDS u/s 194O is not deductible?
E-commerce sellers (resident HUFs or resident individuals) whose total sales do not exceed Rs. 5 lakh are exempted from the TDS deduction. However, they should have provided the Aadhaar or PAN details to their e-commerce operators. Additionally, non-resident sellers are not covered under this section.
5. Are there any penalties under Section 194O?
If an e-commerce operator doesn’t pay and file TDS, the following penalties will be applicable:
- Rs. 200 penalty every day for not filing the TDS quarterly return
- 1.5% penal interest each month or portion thereof for not paying TDS non-payment by the 7th of each month
- 1% interest each month or portion thereof for non-deduction of the TDS amount.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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