Section 194-O

Section 194O - Overview

With the growth in online retailers, it is more crucial than ever to monitor their incomes and taxes. According to Section 194O of the Income Tax Act, these digital facilities are now taxable.

Section 194O was integrated into the Union Budget as of 1 October 2020. The main objective of this section is to include E-Commerce participants under tax legislation. As a result, it has widely improved the TDS base.

What Is Section 194O of the Income Tax Act?

According to Section 194O, e-commerce businesses are required to deduct TDS from participants' gross sales amounts. It ensures that TDS will be deducted at a rate of 1% of the seller's credit. This comprises the provision of goods or services by a participant or the sale of goods by a participant made possible by an online market.

The owner of the digital facility must withhold tax at the time of credit, regardless of the payment method. Section 194O of the Financial Act, 2020 guarantees that taxes are now assessed on the e-commerce platform, which was not the case in the past.

E-commerce Operators and Participants

E-commerce Operators –These are businesses that manage and operate their services and goods digitally. Only this operator is in charge of managing payments to online vendors.

E-commerce Participants - A participant in e-commerce uses e-commerce platforms to buy goods and services and must be a resident of India.

Purpose of Section 194O

The main goal is to include online merchants in the scope of the Income Tax Act. Recently, more people are choosing internet markets over physical markets due to the following reasons.

The business owners POV

• Setting up a business is inexpensive.
• Enables simple buyer search
• Can reach globally to more audience

Buyers POV

• There are several choices on a sole platform
• Comparison of products is effortless
• Can buy products all around the world.

Who Has to Pay Taxes Under Section 194O?

As per this Section, it requires e-commerce participants to pay taxes determined by the IT department as of 1 October 2020. Every e-commerce operator should withhold TDS from any purchases made through the electronic platform at the time of paying the participant.

When a participant's gross sales amount exceeds ₹5 lakh or they don't provide their Pan and Aadhaar, they must pay TDS at 5%.

For instance, let's take a look at this flipkart purchase.

When the credit is granted, the money should be taken out, and Flipkart should send you a Form 16A and file a TDS refund using Form 26Q.

Law Before Section 194O

Before including this section, payments paid to participants in e-Commerce were not tax deductible. They had to submit their income tax return on their own. Many small-scale participants in e-Commerce as a result avoided filing their income tax returns and paying taxes.

Scope of Section 194O

As per the Section, all The e-commerce operators are expected to collect TDS at 1% on crediting the amount of the product sales and services while paying.

E-commerce Participant Being a Resident Individual or HUF

The e-commerce operator must deduct TDS if the total revenue does not exceed ₹5 lakhs in the previous year. And all the participants must submit their Pan or Aadhar card. If the participant fails to submit their Aadhar and PAN card the TDS will be detected at the rate of 5% concerning section 206 AA's Criteria.

Non-Resident E-Commerce Participant

As per the law the E-Commerce participant should be a resident. If the E-Commerce participant is a non-resident then no TDS will be deducted.

Let's Understand Section 194O in Detail

Section 194O of the Income Tax Act, 1961 was introduced in the Budget 2020 to provide for deduction of tax at source on payments made by e-commerce operators to e-commerce participants.

Scope of Application

Section 194O applies to payments made by e-commerce operators to e-commerce participants for facilitating the sale of goods or services through the e-commerce platform.

Rate of TDS

The rate of TDS under Section 194O is 1% on the gross sale amount of the e-commerce participant.

Exceptions to TDS

TDS is not required to be deducted under Section 194O if:

• The gross sale amount of the e-commerce participant during the previous year does not exceed Rs. 5 lakh.
• The e-commerce participant has furnished his or her PAN or Aadhaar number to the e-commerce operator.

TDS Certificate

The e-commerce operator is required to issue a TDS certificate to the e-commerce participant within 15 days of the end of the quarter in which the TDS was deducted.

Filing TDS Return

The e-commerce operator is required to file a TDS return with the Income Tax Department on a quarterly basis. The due dates for filing TDS returns are as follows:

• Quarter ending March: 31 May
• Quarter ending June: 30 September
• Quarter ending September: 31 December
• Quarter ending December: 31 March

Penalties Under Section 194O

The following penalties can be imposed on the e-commerce operator for failing to deduct TDS under Section 194O:

• A penalty of up to 200% of the TDS that should have been deducted.
• A penalty of up to Rs. 10,000 for each default.

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