1% TDS applicable on Payments made to E-Commerce Participants from October 1, 2020 [Read Act]

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.

To Read the full text of the Finance Act 2020 CLICK HERE