E-commerce gained huge popularity after the internet reform in India. And e-commerce widened its reach to billions of people across India. But e-commerce was not taxable under the Income Tax Act until 2020. Section 194O was introduced in the union budget 2020 and came into effect from 1st Oct. 2020. The TDS base was enlarged, and e-commerce was brought under the Income Tax Act.
The Genesis of E-Commerce in India
Section 194O of the Income Tax Act, let’s discuss the origin and growth of e-commerce in India. Its roots can be traced back to the early 2000s with the launch of some popular online marketplaces such as Flipkart and eBay.
These platforms aimed to connect retail buyers and sellers over the internet, listing a wide range of products from books to electronics at competitive prices.
Soon, these e-commerce platforms gained widespread popularity, resulting in the launch of several more such businesses in the forthcoming years. The main factors that fueled the e-commerce revolution in India include the increased penetration of the internet, the proliferation of smartphones, and the emergence of digital payment platforms.
As per the current estimates, there are more than 19,000 e-commerce companies in India. Furthermore, the Indian e-commerce industry is expected to grow at a Compound Annual Growth Rate (CAGR) of 27% to become a 163-billion-dollar industry by 2027.
What is Section 194O of Income Tax Act?
According to Section 194O of Income Tax Act, an E-commerce operator is responsible for deducting TDS at the rate of 1% (TDS rate under Section 194O is now reduced to 0.1% effective from 1st October 2024) of the gross amount credited to the seller’s account or at the time of making payment, whichever is earlier. This applies to any transaction the e-commerce platform facilitates involving goods and services which includes professional and technical services.
The TDS must be deducted at the time of crediting the seller’s account, irrespective of the mode of payment. Section 194O TDS under the Financial Act 2020 imposes taxes on the e-commerce platform, which was not done before.
What is the purpose of section 194O?
Section 194O of Income Tax Act aims to expand the TDS scope by taxing e-Commerce participants. In recent times, digital platforms have become more popular for purchasing or selling goods and services because sellers can save on the setup cost and the effort of reaching the buyers.
Buyers have plenty of choices in one place and can easily compare products.
This has led to a growth in e-commerce users over time. It is difficult to track small sellers (e-commerce participants) who do not file their income tax returns. i.e., the government has broadened the TDS base to include e-commerce participants under the Income Tax Act
What is the scope of section 194O?
If an e-commerce operator sells goods, services, or both to an e-commerce participant, they have to deduct TDS at 1% (TDS rate under Section 194O is now reduced to 0.1% effective from 1st October 2024) when they credit the sale amount to the participant’s account or when they pay the participant in any other way, whichever is earliest.
An E-commerce participant is a resident individual or HUF
- The e-commerce operator does not have to deduct TDS if the total sale amount of goods, services, or both in the last year is less than Rs 5 lakh and if the e-commerce participant has given his PAN or Aadhaar.
If the e-commerce participant has not given his PAN or Aadhaar, TDS will be deducted at 5%, as per Section 206AA.
The e-commerce participant is a non-resident.
- An e-Commerce participant has to be a resident of India. So, no TDS will be applicable if the participant is a non-resident.
Exceptions to Section 194O, if any
- Non-resident e-Commerce participants are exempted from the scope of this section.
- A ceiling limit of Rs 5 lakh is set only for resident individuals and HUF. Thus, an e-Commerce operator is not required to deduct TDS if the amount paid/ credited to individuals/HUF during a financial year does not exceed Rs 5 lakh.
FAQs
Who is accountable for deducting TDS under section 194O?
After the introduction of Section 194O of Income Tax Act, effective from 0ct 2020, the e-commerce operators are responsible for deducting TDS before making payments to the participants.
E-commerce operators are only responsible for deducting TDS if the gross amount of sale of services and goods exceeds 5 lakh during the previous financial year. If the e-commerce participants fail to furnish their PAN, the TDS will be deducted at the rate of 5% under Section 206AA.
What is the exempted limit under section 194O?
The exempted limit under section 194O TDS is Rs. 5 Lakh if the amount is paid to an individual or the Hindu Undivided Family (HUF), i.e., the e-commerce operator will no longer be required to deduct the tax deduction at source.
Non-resident e-commerce participants are also exempted from this section.
