As e-commerce platforms in India are expanding at a fast pace, the government came up with unique tax provisions to guarantee enhanced reporting and tax conformity in internet transactions. Section 194O of the Income Tax Act, 1961, that pertains to tax deduction at the source (TDS) on payments made using e-commerce operators, is one such provision. This part places the responsibility for collecting TDS on digital platforms on sellers who use them.
The blog describes Section 194O in simple and practical terms, including its definition, applicability, statutory rate of TDS, exemptions, compliance and its effects on the seller and operators of the e-commerce business.
Introduction
In India, e-commerce has changed the mode of doing business. Since the times of the online markets that sell goods and the platforms that provide services, now the digital intermediaries are at the centre stage of bringing the sellers and buyers together. Although this growth has enabled it to provide new economic opportunities, it has also proved to be a challenge to tax administration in terms of the volumes and types of transactions.
In response to this, Section 194O was amended by coming into effect on 1 October 2020. It was aimed at creating more transparency in online transactions and making sure that revenue obtained with the help of online platforms is subject to taxation. This is one of the provisions which should be understood by the operators and sellers using such e-commerce.
What is Section 194O?
Section 194O simply provides that an e-commerce operator must deduct tax at source on the payment that it makes to participants of the e-commerce to sell goods or perform services through its platform.
In layman’s terms, when a seller sells goods using an online platform, it is the role of the platform to ensure that TDS are deducted and then the payment is released to the seller. This is irrespective of whether the payment is made to the seller directly or channelled through the platform.
Who is an E-Commerce Operator?
An e-commerce operator is somebody who is the owner of a digital or electronic facility or platform of electronic commerce, or its operator or manager. It contains online markets, applications, and websites that handle the dealings between the purchasers and the vendors.
Famous ones are websites where third-party vendors can post items or services and receive payment from customers.
Who is the E-Commerce Participant?
An e-commerce participant is somebody who sells commodities or offers services using an e-commerce platform. These cover individual sellers, proprietors, partnerships, and companies that utilize internet-based platforms in order to access customers.
The provision applies even if the participant does not have a physical presence or office at the platform’s location.
Rate of TDS Under Section 194O
The TDS rate under Section 194O is 1% of the gross amount of sales or services facilitated through the e-commerce operator.
This deduction is made at the time of:
- credit of the amount to the seller’s account, or
- payment to the seller,
- whichever is earlier.
The TDS is deducted from the total sale value and not from the commission or net payout.
Threshold Limit for TDS Deduction
Section 194O provides relief to small sellers. TDS is not required to be deducted if:
- the e-commerce participant is an individual or HUF, and
- total sales or services during the financial year do not exceed ₹5 lakh, and
- the participant has furnished PAN or Aadhaar to the operator.
If PAN or Aadhaar is not provided, TDS is deducted irrespective of the turnover limit.
When is Higher TDS Applicable?
If the e-commerce participant fails to provide PAN or Aadhaar, the TDS rate increases to 5%, as per Section 206AA. This can significantly impact cash flow, especially for small sellers.
Therefore, furnishing PAN details to the platform is critical.
Applicability to Services and Goods
Section 194O applies to:
- sale of goods,
- provision of services, and
- combination of both.
It covers services such as online tutoring, freelance services, food delivery, and accommodation booking, if facilitated through an e-commerce platform.
GST and Section 194O
TDS under Section 194O is deducted on the gross amount, including GST. This often leads to confusion among sellers, as tax is deducted even on the GST component. However, this is clearly provided under the law.
Compliance Responsibilities of E-Commerce Operators
E-commerce operators must:
- deduct TDS at the applicable rate,
- deposit the deducted amount with the government within the prescribed timelines,
- file quarterly TDS returns, and
- issue TDS certificates to participants.
Failure to comply can result in interest, penalties, and disallowance of expenses.
Impact on Sellers
For sellers, TDS under Section 194O is not an additional tax but an advance tax credit. The deducted amount can be claimed while filing the income tax return.
However, sellers must ensure proper reconciliation between:
- gross sales,
- TDS is deducted, and
- income is declared in returns.
Mismatch may lead to notices or delayed refunds.
Common Issues Faced in Practice
Many sellers face challenges such as:
- difficulty in reconciling gross sales with net payouts,
- confusion between commission and sale value,
- delayed reflection of TDS in Form 26AS.
Maintaining proper records and MIS reports helps avoid these issues.
Exemptions and Non-Applicability
Section 194O does not apply where:
- The platform merely provides advertising space without facilitating sales, or
- The transaction is not routed through electronic commerce.
Each case must be evaluated based on the nature of the platform’s involvement.
Conclusion
Section 194O marks an important step in strengthening tax compliance in India’s digital economy. By placing the responsibility of TDS deduction on e-commerce operators, the provision ensures better reporting and transparency in online transactions. While it may affect cash flows for sellers, it also helps build a formal tax record and reduces future disputes. For smooth compliance, both platforms and sellers must clearly understand their obligations and maintain accurate transaction records.
