Why was section 194-O inserted?
Worldwide various small businesses and entrepreneurs conduct their businesses with a view of continuous expansion. In earlier era, these businesses have to reach their target customers physically in order to sell their products or services. However, with the technological evolution world has come closer to every individual. This gave birth to E-commerce operators. E-commerce operators are the ones providing digital platform services to businesses across the world where customers can access these platform to transact with the organisations they desire.
Now in India, various small scale businesses have registered their businesses on these e-commerce operators platforms. These are called as e-commerce participants(buyers and sellers). These e-commerce participants used to escape Income Tax Return fillings due to lower turnover reporting. However, to tackle this issues Income Tax Department through introduction in Finance Act, 2020 inserted Section 194-O mandating that an e-commerce operator (ECO) shall deduct income-tax at the rate of 1% of the gross amount of sale of goods or provision of services or both, facilitated through its digital or electronic facility platform. In simple terms, an ECO will deduct TDS of its E-commerce participants at 1% for the Gross amount of the transaction taking place.
Who is required to deduct TDS u/s 194-O?
E-Commerce operators are required to deduct TDS @1% at the time of credit of the amount of sale of goods, services, or both to the account of an e-commerce participant(i.e. seller in general) or at the time of making payment to an e-Commerce participant by any other mode, whichever is earlier.
Exemption given to Individuals and HUFs following below mentioned condition is fulfilled:
If e-commerce participant is a resident individual or HUF having transactions of Gross amount not exceeding Rs. 5 Lakh and such individual or HUF furnishes PAN to e-commerce operator, then TDS on such transaction shall not be deducted by e-commerce operator.
Non-resident e-commerce participant is also exempted from TDS Deduction.
In case of failure to furnish PAN , TDS shall be levied at 5% of Gross amount as per Section 206AA.
Guidelines as per Circular No. 20 of 2023
>Who is required to deduct TDS u/s 194-O when there are multiple e-commerce operators or different e-commerce operators for buyers and different e-commerce operators for sellers
After the insertion of Section 194-O, for dealing with TDS requirements by ECO and E-commerce participants, various issues were raised by e-commerce participants regarding deduction of tax in case of multiple e-commerce operators i.e. who is liable to deduct tax in such case. Generally ECO deduct tax on gross amount and transfers balance amount to the seller. However, concerns were raised in respect of platform or network (e.g. Open Network for Digital Commerce) on which multiple ECO are participating in a single transaction.
E.g. A is a buyer and PPQ Ltd. is an ECO for A, handling buyer side functions and B is a seller and XYZ Ltd. is an ECO for B, handling seller side functions.
In the above given example, seller side ECO i.e. XYZ Ltd. is required to complete the compliance u/s 194-O as seller side ECO is the party who makes the final payment to the seller.
Here seller side ECO is required to file TDS return in Form 26Q and furnish the certificate in form 16A to seller.
> In case of multiple ECO if seller side ECO is the actual seller of Goods or services
Let us understand this in detail.
For e.g.
A is a buyer of the goods. Chirag & Sons LLP are ECO providing interface to the buyer.
Tripozone Ltd. is the ECO through which seller and Buyer side ECO are interacting.
Paras & Sons Ltd. is seller as well as an ECO itself.
In the given scenario, Tripozone Ltd. is liable for compliance u/s194-O as it is ECO making final payment to the seller ECO i.e. the seller itself.
Therefore, it is cleared from the above scenario that the ECO making final payment to the seller is required to comply with the provisions of Section 194-O.
> Convenience fees and commission charged by ECOs to seller and seller recoups all these amounts from buyer. On what amount TDS is to be deducted?
In a situation where ECOs from either side levy shipping fees, convenience fees or commssions to seller and at the end seller recoups all these amounts and charge the same to buyer. It is common that sellers charge additionally for shipping to the buyers. Sellers recover these amounts from buyers.
As per clarifications given in the circular, TDS shall be deducted on the Gross amount of products or services. This will also include any amount charged by ECOs(from either side) in the form of convenience fees, shipping charges or commission etc.
It is specifically given in the circular that TDS deducted u/s 194-O(1) as discussed above will not be subject to any other provision of TDS under the Act. However, this is subject to provisions of section 194S(4) dealing with Virtual Digital Assets.
> Whether GST or other state taxes like VAT etc. are included in the Valuation of Gross amount for the purpose of deducting TDS as per section 194-O
It is clarified in the multiple previous circulars, that u/s 194-O of the Act, when tax is deducted at the time of credit of the amount in the account of the seller and GST/state tax component is shown separately, tax shall be deducted on the amount without including such GST/state tax amount.
However, if tax is deducted on the payment basis because the payment is made earlier than the credit, the tax would be deducted on the whole amount as it is not possible to identify that payment with GST/state tax levies and taxes component of the amount to be invoiced in future.
Conclusion
Taxation under section 194-O was a tedious task for sellers and ECOs before clarifications provided by government in the form of circulars. Liability to deduct TDS u/s194-O has been discussed in the given circular on a detailed basis which would help all the parties involved in the transaction through ECO. This circular was also issued keeping in mind future possible scenarios where multiple ECOs would be involved in a single transaction. This circular therefore helps in ascertaining the party liable to deduct TDS u/s194-O, inclusions in the valuation of Gross amount, rate of TDS, provisions regarding GST, Commssions, convenience fees, shipping fees, advertisements etc.
Circular Link : https://incometaxindia.gov.in/communications/circular/ciruclar-20-2023.pdf
About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.