Section 194O of Income Tax Act

The e-commerce sector in India has been growing by leaps and bounds. With an increasing number of individuals opting to purchase a wide range of products online, the sector is likely to grow further in the future. 

Recognising the fast-growing nature of the sector, the government of India, in a bid to increase tax revenue, brought about section 194O of the Income Tax Act. The provisions of this section deal with tax deductions at source (TDS) on the sale of goods and services on e-commerce platforms.

Continue reading to learn more about section 194O of the Income Tax Act, its scope and purpose, the rate of TDS to be charged, exceptions to the section, and the consequences of not complying with the provisions.  

Know More About How to File TDS Return?        

What Is Section 194O of the Income Tax Act?

Section 194O of the Income Tax Act was introduced in the Finance Act of 2020 and came into effect on October 1, 2020. According to the provisions of this section, e-commerce operators must deduct TDS from the payments they make to e-commerce participants. The primary purpose of the introduction of this section was to ensure that the income generated through e-commerce platforms is captured and taxed.

To prevent ambiguity and confusion, section 194O clearly defines the terms e-commerce operators and e-commerce participants. Here is what they mean: 

• E-commerce operators are individuals and entities that own, operate, and manage a digital platform or facility that enables the purchase and sale of goods and services electronically (electronic commerce).
• E-commerce participants are resident Indian individuals and entities selling goods and services through a digital platform meant for electronic commerce.          

Section 194O of the tax act also states that the TDS must be deducted at the time of making payment to the respective e-commerce participants for the amount of sales of goods and services made through the e-commerce platform.  

What Is the Rate of TDS Deduction Under Section 194O of the Income Tax Act?

Currently, the section 194O TDS rate is 1%, which must be deducted from the gross sales of goods and services made by e-commerce participants. 

For instance, let us assume that an e-commerce participant made a gross sale of ₹6,70,000 during a month. In this case, the operator must deduct TDS at 1% on ₹6,70,000, which comes up to ₹6,700. Once the TDS is deducted, the operator can credit the remaining amount of ₹6,63,300 (₹6,70,000 – ₹6,700) to the participant.

Budget 2024 Update

The Budget 2024 brought in an amendment to section 194O, where it has been proposed to reduce the TDS rate to 0.1% of the gross sales of goods and services made by e-commerce participants. This new section 194O TDS rate will be effective from October 1, 2024. 

That said, the above rate of TDS will only be applicable if the e-commerce participant furnishes details of their Permanent Account Number (PAN) to the e-commerce operator. If PAN is not furnished, the operator must deduct TDS at the rate of 5% on the gross sales made by the participant. 

What are the Consequences of Non-Compliance With the Provisions of Section 194O of the Income Tax Act?

Failing to comply with the provisions of section 194O of the Income Tax Act can have serious consequences. Here is a quick overview of the possible legal ramifications. 

• Penalty

As per section 271C of the Income Tax Act, if an e-commerce operator does not deduct and pay TDS under section 194O, a penalty equivalent to the amount of TDS that was supposed to be deducted and paid would be levied. 

• Interest 

If TDS under section 194O was not deducted on time, interest at the rate of 1% per month on that amount will be levied. The interest will be levied from the date on which the deduction was supposed to be made to the actual date of the deduction. 

If TDS under section 194O was deducted but not paid on time, interest at the rate of 1.5% per month on the unpaid amount will be levied. The interest will be levied from the date on which the TDS was supposed to be deposited to the actual date of deposit. 

What are the Exceptions to Section 194O of the Income Tax Act?

There are two major exceptions to section 194O of the Income Tax Act. Firstly, these provisions are not applicable to e-commerce participants who are not residents of India. In the case of non-resident e-commerce participants, e-commerce operators can credit the gross sales directly to the participants’ accounts without deducting any TDS.

The other major exception to section 194O involves resident individuals and Hindu Undivided Families (HUFs). If the gross sales to be credited to resident individuals and HUFs during a financial year are less than ₹5 lakh during a financial year, e-commerce operators need not deduct any TDS. However, once the gross sales exceed ₹5 lakh during a year, the e-commerce operator must start deducting TDS at the appropriate rate.  

Conclusion

Section 194O of the Income Tax Act of 1961 was introduced with the aim of bringing the income earned by e-commerce participants within the tax net. To ensure that appropriate taxes are paid and accounted for, the provisions of this section place the responsibility of deducting and depositing TDS with the e-commerce operators. 

Now, it is important to note that from October 1, 2024, onwards, the section 194O TDS rate will be 0.1% of the gross sales made by the e-commerce participants instead of 1%. Whether you are an e-commerce operator or an e-commerce participant, knowing your tax liability is crucial. A TDS calculator can help you accurately determine the amount of tax that needs to be deducted from your gross e-commerce sales.  

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