Analysis of newly inserted Section 194O

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The Union Budget brought about an insertion of Section 194O in the Income Tax Act,1961 effective from 1st October,2020 which warranted a tax deduction of 1% of the gross amount of goods, services, or both by the E-Commerce Operator while making payment to E-commerce participant.  

E-Commerce Operators and E-commerce Participants  

As per the provisions of Section 194O 

e-commerce operator” means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce and is responsible for paying to e-commerce participant” and  

 “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” 

Interpretation: E-commerce participant (say ABC Creation Ltd.), required to be a Resident in India, can be any person selling its goods or services or both through a digital platform provided by an E-commerce Operator (say, Amazon). Now if a consumer like you and me, make a purchase on AmazonAmazon being an E-commerce operator will further make the payment to ABC creation Ltd. for the purchase so made.  

Incidence, Rate and Amount on which TDS is to be deducted under Section 194O 

The E-commerce Operator should deduct TDS @ 1% on the gross amount of such sales or service or both 

  1. at the time of credit of amount of sale or services or both to the account of an e-commerce participant or; 
  2. at the time of payment thereof to such e-commerce participant by any mode,  

whichever is earlier. 

Any payment made by a purchaser of goods or recipient of services directly to an E-commerce participant shall be deemed to be amount credited or paid by the E-commerce Operator to the E-commerce participant and shall be included in the gross amount of such sales or services for the purpose of deduction of income-tax. 

Illustration:  Continuing with the above illustration, Suppose Amazon credited Rs.1,00,000/- to ABC Creation Ltd. On 31.01.2020 for the sale of products during the month of January and further made payment to ABC Creation Ltd. on 05.02.2020. Further if any consumer, let say X made a purchase on 28.01.2020 of Rs.5,000/- and paid directly to the E-commerce participant (ABC Creation Ltd. in this case) via the payment gateway facilitated by the E-commerce Operator i.e. Amazon, then the following scenario will be there 

  1. Amazon has to deduct TDS as per Section 194O being an E-commerce Operator. 
  2. TDS shall be deducted on date of payment i.e. 31.01.2020 being earlier.
  3. TDS shall be deducted on gross amount being Rs.1,05,000/- (Rs.1,00,000/- + Rs.5,000/-) It will be deemed that Amazon has made payment to ABC Creation Ltd for the amount of Rs.5,000/-  credited directly by the consumer X to the ABC Creation Ltd.hence included in the gross amount of such sale. 

 

Exceptions/Exemptions under 194O  

There are 2 cases where the E-commerce participant will not be required to deduct TDS: 

  1. E-commerce participant being a Resident Individual or HUF : If an Individual or HUF, who are a Resident in India have a gross receipt of amount on sales of goods, services or both, but such amount does not exceed five lakh rupees in the previous year then the E-commerce Operator is not required to deduct TDS on such amount. 

ConditionE-commerce participant should have furnished its Permanent Account Number (PAN) or Aadhaar number to the E-commerce Operator. 

Analysis: The limit of Rs.5,00,000/- is simply because income tax upto Rs.5,00,000/- is NIL due to rebate provided u/s 87A. 

Note: If the E-commerce participant does not furnish his PAN or Aadhaar number, TDS must be deducted at the rate of 5%, as per amended provisions of Section 206AA. 

2. E-commerce participant being a Non-Resident : The provisions of section 194O is only attracted if the E-commerce participant is a Resident. No tax deduction is required to be made if the E-commerce participant is a non-resident. 

Miscellaneous provisions under this Section 

  1. A transaction in respect of which TDS has been deducted under this section or which is not liable to deduction under the exemption, there shall not be further liability on that transaction for TDS under any other provision of Chapter XVII-B of the Act. This is to provide clarity so that same transaction is not subjected to TDS more than once.
  2. However, it has been clarified that the above exemption will not apply to any amount received or receivable by an E-commerce Operator for hosting advertisements or providing any other services which are not in connection with the sale of goods or services referred to in sub-section (1) of the proposed section.
  3. services” is defined to include fees for technical services and fees for professional services, as defined in section 194J.
  4. E-commerce Operator means any person and there is no distinction has been made for resident or non-resident for E-commerce Operator. 
  5. Whether sales include tax such as GST is yet to be clarified. 

Conclusion 

Central Government in order to widen and deepen the tax net by bringing participants of E-commerce within the ambit of tax, has inserted this section. The government’s objective of identifying the whole range of sellers who are engaged as E-commerce participants and keeping a tab of all the transactions undertaken by them in the course of business will be fulfilled. This will further bring the E-commerce participant within the tax net i.e. there will be transparency on the income earned by seller of goods/provider of service through digital platforms. It will also help the government to collect revenue easily. 

 

 

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