Brief History of Section 194O
Section 194-O was introduced in the Budget of 2020 w.e.f. 1st October 2020. As per this section, the E-Commerce operators are required to deduct TDS while crediting the account of Resident E-Commerce participant (as buyer or seller) or making the actual payment whichever is earlier. The section doesn’t apply to Non-Resident E-Commerce Participants.
Rate of TDS under section 194-O is 1% of the gross amount of the sale for all the assessees. In case PAN is not furnished the rate of TDS is 5%.
There is an exception here that in case payment to Individual or HUF is less than Rs 5,00,000/- and PAN or Aadhar is furnished to ECO, there will be no requirement of deducting TDS.
CBDT issued guidelines vide circular no 17 dated 29th September 2020 to clarify on following issues:
1. Whether the section applies to transactions carried through various Exchanges:
- The question arose because alongwith Section 194-O, a subsection (1H) was inserted in Section 206C which required the seller of the goods to collect TCS @ 0.1% of the sale consideration over and above Rs 50,00,000/- at the time of receipt of consideration.
- Because of simultaneous applicability of both the above sections the issue posed before the CBDT was in the case of transactions done through exchanges where the identity of the buyer and the seller is unknown. In such cases, it is not possible for a deductor to comply with the TDS/TCS provisions.
- CBDT has clarified that both the above sections will not be applicable to the transactions done through recognised stock exchanges or recognised clearing corporations, transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges.
2. How to deal with E-commerce transactions for which payments are managed by payment gateways, as in such cases the applicability of Section 194-O may fall both on E-Commerce Operator and the Payment gateway?
- CBDT clarified that in such cases, if the TDS is deducted by the ECO itself then there will be no liability on the payment gateway to deduct TDS. To ensure the proper compliance, the payment gateway has to take an undertaking from the ECO regarding such deduction of TDS.
3. Whether Section 194-O will be applicable on insurance agent or insurance aggregator in subsequent year on renewal of Insurance:
- There are cases where people buy insurance through insurance agents or insurance aggregators but while renewing the policy they renew directly with the insurance company.
- In such cases, CBDT clarified that as there is no involvement of insurance agents or aggregators in subsequent years, there will be no liability on them to deduct TDS under section 194-O. However, if the insurance company is paying commision to those agents in subsequent years, then the company is liable to deduct TDS under section 194D.
Clarifications on the following were issued vide circular no 20 dated 25th November 2021.
Applicability of Section 194-O on E-auction services carried out through electronic portal:
The issue before CBDT was whether TDS under section 194-O will be applicable in transaction of e-auction, where e-auctioneer is merely involved for discovering the prices through bids.
CBDT clarified that in such a scenario if all of the following conditions are satisfied then TDS under this section will not be applicable. The extracts of the circular have been produced below:
- The e-auctioneer conducts e-auction services for its clients in its electronic portal and is responsible for the price discovery only which is reported to the client.
- The price so discovered through e-auction process is not necessarily the price at which the transaction takes place and it is up to the discretion of the client to accept the price or to directly negotiate with the counter-party.
- The transaction of purchase/sale takes place directly between the buyer and the seller party outside the electronic portal maintained by the e-auctioneer and price discovery only acts as the starting point for negotiation and conclusion of purchase/sale.
- The e-auctioneer is not responsible for facilitating the purchase and sale of goods for which e-auction was conducted on its electronic portal except to the extent of price discovery.
- Payments for the transactions are carried out directly between the buyer and the seller outside the electronic portal and the e-auctioneer does not have any information about the quantum and the schedule of payment which is decided mutually by the client and the counterparty.
- For payment made to e-auctioneer for providing e-auction services, the client deducts tax under the relevant provisions of the Act other than section 194-O of the Act.
CBDT further clarified that if any one of the above conditions is not satisfied, then it will fall within the scope of section 194-O. Further the buyer and seller will be liable to the relevant TDS/TCS provisions of section 194Q- TDS on purchases and section 206C(1H) – TCS on sale of goods.
CBDT issued circular no 20 dated 28th December 2023 clarifying on following issues.
1. Who should deduct tax at source where there are multiple E-commerce Operators involved in a transaction?
Multiple E-Commerce Operators (ECO) are involved in a transaction but Seller side ECO is not the actual seller. In this situation the seller side ECO, who is finally making the payment to the actual seller, will be liable to deduct the TDS. The ECO would be required to file Form 26Q TDS return and issue TDS certificate in Form 16A to the seller. E.g. Mr. A places an order on an online portal for a Product sold by ABC Ltd. by making online payment through Razor pay payment gateway. In this case, Razorpay who will finally be making payment to ABC Ltd will be liable to deduct TDS @ 1%.
Multiple ECO are involved in a transaction and Seller is also an ECO. In this situation, the ECO, who is making payment to Seller ECO, will be liable to deduct TDS of seller ECO. Compliances of filing TDS returns and issuing Form 16A to Deductees are also applicable here. E.g. Mr. A purchases a subscription to Amazon Audible by paying online through Razor pay. Here Audible subscription is sold by Amazon which is an ECO. In this case, Since Amazon ECO itself is the seller of the services, Razorpay will deduct TDS while making payment to Amazon.
2. E-commerce operators may be levying convenience fees or charging commission for each transaction and sellers might levy logistics & delivery fees for the transaction. Payments may also be made to the platform or network provider for facilitating the transaction. Would these form part of “gross amount” for the purposes of TDS under section 194-O of the Act?
The answer to this question is Yes. For the purpose of calculating TDS the charges like convenience fees, delivery fees or any other related charges will form part of the gross amount. When the purchase of goods involves physical delivery of goods and payment is made online then the charges for these will be charged to the seller and which ultimately be recovered from the buyer. So these amounts will form part of the gross amount of sales and will be liable for TDS.
This can be explained with the following Example :
– Cost of Goods: Rs. 1,000/-
– Packing and Shipping Fees: Rs 200/-
– Convenience Fees: Rs. 10/- (Rs 3 Charged by buyer side ECO say portal on which order for goods is placed and Rs 7 charged by Seller side ECO say payment gateway). All these costs will be added to the Invoice of the goods.
Here the Total Invoice Amount will be Rs. 1,210/-. Seller will be receiving Rs 1200/- less TDS on gross amount i.e. 1210/-. The ECO deducting TDS will have to file TDS return and issue Form 16A to the seller.
In cases where the payment gateway charges are agreed on a lump sum basis and are not transaction specific then TDS is not applicable on these charges.
The circular further says
As per sub-section (3) of section 194-O of the Income Tax Act, a transaction for which tax has already been deducted by an E-commerce Operator (ECO) under section 194-O, then it will not be liable for TDS under any other provisions within Chapter XVII-B of the Income Tax Act.
Accordingly, this will also apply to the amount received by ECO for provision of their services which are part of the original transaction of sale of goods or provision of service. However, sub-section (4) of section 194S of the Act overrides Section 194-O of the Act and states that if tax is deducted under section 194-S of the Act, no tax is deductible under Section 194-O of the Act.
Simply put, if the TDS on a particular transaction is applicable under both sections 194O and 194S then the TDS will be applicable under Section 194S – Payment on transfer of virtual digital assets, which has an overriding effect. This is also logical based on the concept of specific provisions applicability over general provisions in any Act.
3. How will GST, various state levies and taxes other than GST such as VAT/Sales tax/ Excise duty / CST be treated when calculating gross amount of sales of goods or provision of services as per the provisions of section 194-O of the Act?
If any indirect taxes like GST are charged on the goods or services and the same is mentioned separately on the Invoice, then the same shall be excluded while calculation of TDS deduction on the Invoice. However, if the TDS is deducted on advance payment, tax will be deducted on the full amount as at the advance payment stage the breakup of the basic amount and the tax amount are not available separately.
Impact of discount given by seller as an e-commerce participant or by any of the multiple e-commerce operators?
- Discount is given by seller: As the discount is given by seller then the seller himself is reducing the price of the product in that case the price after discount becomes the gross amount on which TDS is applicable.
E.g. MRP of a product is Rs 15,000/- and the seller is offering a 20% discount to the buyer. In this case TDS is applicable on discounted amount of Rs. 12,000/- assuming that the amount is exclusive of GST.
- Discount is given by Buyer ECO or Seller ECO: In such cases buyer is paying the discounted amount but the seller is receiving the full amount. Continuing the same example as above, there is an offer given by X payment gateway that if the buyer pays through their gateway, they will get a 10% discount. Here the flow of payment is
- Buyer pays Rs 13,500/- on the payment gateway
- ECO adds Rs 1,500/- to it and transfers it to Seller.
Here the seller is receiving the full amount i.e. Rs 15,000/- TDS will be deductible on Rs. 15,000/- by the ECO and not 13,500/- which the buyer has paid.