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Selling on e-commerce platforms? Here's how TDS will impact your business!

Section 194-O introduced by the Finance Act, 2020 brings all e-commerce participants within the ambit of TDS. Here's how it will impact your e-commerce sales.
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Budget 2020 brought about a slew of changes including the much talked-about insertion of section 194-O to the Income Tax Act, 1961 (IT Act).

Tax Deducted at Source commonly known as TDS is a system of deduction of tax at the point of generation of income. In other words, tax (at notified rates) is deducted at the source of origin of the income. The provisions of TDS are applicable on specific categories of payments such as salary, interest, commission, brokerage, professional fees, royalty, contract payments, etc.

Introduction of section 194-O by the Finance Act, 2020 brings all e-commerce participants within the ambit of TDS. This section would be applicable from 1st October 2020

Applicability of section 194-O

This section is applicable on transactions between an e-commerce operator and an e-commerce participant

  • e-commerce operator means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce;
  • 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

Scope of section 194-O

Every E-commerce operator, which facilitates the sale of goods or provision of services through its digital or electronic facility or platform, shall be required to deduct tax at source at the rate of 1% of the gross amount of such sales at the time of payment of such sale to the e-commerce participant.

Gross amount of sale is the amount paid by the buyer of goods or recipient of services directly to the E-commerce operator for facilitating such sale of goods or provision of services. This implies that the gross amount will include GST, commission or any other service fee charged by the E-commerce operator.

Illustration

Let's say Simran sells gadgets through Amazon and other e-commerce platforms. Simran is an e-commerce participant and the platform she uses to facilitate the sale (in this case Amazon) is an e-commerce operator.

Pre TDS scenario

If Raj bought Simran's gadgets through an e-commerce operator for ₹10,000, Simran received ₹9,000 for such sale (after deduction of commission, service fee etc.) from the e-commerce operator.

Post TDS scenario

Under the provisions of section 194-O, the e-commerce operator will now deduct tax at source at 1% before remitting the payment to Simran i.e.

Amount paid by customer ₹ 10,000

less: Commission/ service fee ₹ 1,000

less: TDS @1% of ₹10,000= ₹ 100

Amount credited or paid to Simran's account = ₹8,900

Exemption

The following e-commerce participants are exempt from such TDS:

1. Where the gross amount of sale or services or both during the previous year does not exceed ₹ 5 lakh and

  • the e-commerce participant is an individual or Hindu undivided family and
  • has furnished his/her Permanent Account Number or Aadhaar number to the e-commerce operator, no deduction under sub-section (1) of 194-O shall be made from any sum credited or paid or likely to be credited or paid to the account of such e-commerce participant.

2. Where an e-commerce participant is a non-resident

The above-mentioned TDS levy has been introduced with the objective to "widen and deepen" the tax net, which it certainly does.

Having said that, in light of the current economic slowdown caused by COVID-19, small scale businesses and service providers selling through online platforms will suffer further as they witness a working capital crunch due to the tax withheld. Similarly, online platforms facilitating sales for buyers and sellers will need to comply with the provisions of TDS, file TDS returns and capture tax details to ensure administrative ease for the vendors.

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