DEDUCTION OF TAX ON PAYMENT OF CERTAIN SUMS BY E-COMMERCE OPERATOR TO E-COMMERCE PARTICIPANT [SECTION 194-O]
Section 194R of Income Tax Act, 1961 specifies the provisions for deduction of tax by e-commerce operator for facilitating sale of goods or providing services through e-commerce participants. This section is applicable from 1st October 2020.
Analysis of Provisions of Section 194-O
Applicability: Where sale of goods or provision of services of an e-commerce participant is facilitated by an e-commerce operator through its digital or electronic facility or platform (by whatever name called) such e-commerce operator shall, deduct TDS. [194-O(1)].
Rate of TDS: 1% of the gross amount of such sales or services or both. [194-O(1)]. For the reason that ‘GROSS’ word is used TDS is also required to be deducted on GST portion of the sales/service proceeds
Time of Deduction:
— At the time of credit of amount of sale or services or both to the account of an e-commerce participant or
At the time of payment thereof to such e-commerce participant by any mode, whichever is earlier,
No TDS shall be deducted under this section, if all following three conditions are satisfied:
— E-commerce participant is an individual or HUF.
Gross amount of sale or services or both during the previous year does not exceed 5 lakh rupees
E-commerce participant has furnished his PAN or Aadhaar number to the e-commerce operator.
A transaction in respect of which tax has been deducted by the e-commerce operator under sub-section (1), or which is not liable to deduction under sub-section (2), shall not be liable to tax deduction at source under any other provision of this Chapter. [194-O(3)]
In simple words, if on any transaction, TDS has been deducted under this section, or not been deducted due to condition specified in point no.3 above, no TDS shall be deducted under any other section.
However, TDS will be deducted on amount received by e-commerce operator for hosting advertisements or providing any other services which are not in connection with the sale or services referred to point no.1. For example, Amazon runs an advertisement on its website but not for facilitating sale of goods or provision of services of an e-commerce participant, then TDS u/s 194C or any other section may be deducted.
For purpose of this section
"E-commerce operator" means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce. Ex: Flipkart, Amazon etc.
"E-commerce participant" means a person resident in India selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce;
Amount on which TDS to be deducted: For the purposes of sub-section (1), any payment made by a purchaser of goods or recipient of services directly to an e-commerce participant for the sale of goods or provision of services or both, facilitated by an e-commerce operator, shall be deemed to be the amount credited or paid by the e-commerce operator to the e-commerce participant and shall be included in the gross amount of such sale or services for the purpose of deduction of income-tax under this sub-section.
Let us understand this with an example:
Mr. A sells his goods of worth Rs.1000 through Amazon to Mr. B. Now amazon will collect this amount from Mr. B and pay it to Mr. A after retaining some of amount as its charges. Let us say that amazon deducts 5% of sale receipts as its charges. So, amazon will pay Rs. 950 to Mr. A (after deducting 5% of Rs.1000). However, TDS u/s 194-O is to be deducted on amount collected from Mr. B i.e., Rs.1000. Therefore, Amazon will have to deduct TDS @1% on Rs.1000.
Some further Clarifications [ Inspired by Circular no. 17/2020 dated 29.09.2020 issued by CBDT]
i. Applicability on transactions carried through various Exchanges: Provisions of section 194-O of the Act shall not be applicable in relation to, -
Transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation, including recognized stock exchanges or recognized clearing corporation located in International Financial Service Centre;
Transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC.
ii. Applicability on payment gateway:
In e-commerce transactions, the payments are generally facilitated by payment gateways. It is represented that in these transactions, there may be applicability of section 194-O twice i.e., once on e-commerce operator who is facilitating sell of goods or provision of services or both and once on payment gateway who also happen to qualify as e-commerce operator for facilitating service.
To illustrate a buyer buys goods worth one lakh rupees on e-commerce website "XYZ" . He makes payment of one lakh rupees through digital platform of "ABC". On these facts liability to deduct tax under section 194-O may fall on both "XYZ" and "ABC".
In order to remove this difficulty, it is provided that the payment gateway will not be required to deduct tax under section 194-O of the Act on a transaction, if the tax has been deducted by the ecommerce operator under section 194-O of the Act, on the same transaction.
Hence, in the above example, if "XYZ" has deducted tax under section 194-O on one lakh rupees, "ABC" will not be required to deduct tax under section 194-O of the Act on the same transaction. To facilitate proper implementation, "ABC" may take an undertaking from "XYZ" regarding deduction of tax.
iii. Applicability of on insurance agent or insurance aggregator:
It has been represented that insurance agents or insurance aggregators in many cases have no involvement in transactions between insurance company and the buyer for subsequent years. It has been represented that in subsequent years, the liability to deduct tax may arise on the insurance agents or insurance aggregators even if the transactions have been completed directly with the insurance company. This may result into hardship for the insurance agents/aggregators.
In order to remove difficulty, it is provided that in years subsequent to the first year, if the insurance agent or insurance aggregator has no involvement in transactions between insurance company and the buyer of insurance policy, he would not be liable to deduct tax under section 194-O of the Act for those subsequent years. However, the insurance company shall be required to deduct tax on commission payment, if any, made to the insurance agent or insurance aggregator for those subsequent years under the relevant provision of the Act.
Let us understand this with help of an example: Suppose Max Life Bupa sells its policy to Mr. P through Policy bazar. The first premium (collected at the time of sale of policy) on this will be collected by Policy Bazar and will paid to Max Life Bupa after deduction of TDS u/s 194-O. However, the subsequent period premium(s) will be paid by Mr. P directly to Max Life Bupa. So, on this subsequent premium(s), Policy Bazar is not liable to deduct TDS u/s 194-O. However, Max Life Bupa may pay commission on such subsequent premiums to Policy Bazar, on which TDS u/s 194D is to be deducted .
iv. Calculation of threshold for the financial year 2020-21:
Since this section came into effect from 1st October 2020 following clarification was provided for calculation of threshold(s) of this section:
Since the threshold of five lakh rupees for an individual/ Hindu undivided family (being ecommerce participant who has furnished his PAN/Aadhaar) is with respect to the previous year, calculation of amount of sale or services or both for triggering deduction under section 194-O of the Act shall be counted from 1st April, 2020. Hence, if the gross amount of sale or services or both facilitated during the previous year 2020-21 (including the period up to 30th Sept 2020) in relation to such an individual/Hindu undivided family exceeds five lakh rupees, the provision of section 194-O shall apply on any sum credited or paid on or after 1st October, 2020.
CA Pranay Jain is a young and aspiring Chartered Accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.
He is also socially active on LinkedIn at linkedin.com/in/capranayjain
CA Pranay Jain