Section 194O of Income Tax Act – TDS on E-Commerce Transactions Explained

Key Takeaways

• Section 194O of the Income Tax Act is a provision made for the e-commerce operators and e-commerce participants. 
   
• According to this section, TDS needs to be deducted by operators when they pay money to the sellers. The rate of TDS before 1st October 2024 was 1%. After 1st October 2024, the TDS rate for Section 194O is 0.1%.
   
• Only sellers whose annual income exceeds ₹5,00,000 are eligible for this TDS deduction. Also, if they provide Aadhaar or PAN, then TDS is 0.1%. However, if they fail to provide PAN or Aadhaar, then 5% TDS will be deducted.

Section 194O requires e-commerce operators to deduct tax at source (TDS) when they make payments to sellers for the sale of goods through their platforms. 

Section 194O helps in making sure that the income earned by online sellers is accounted for and taxed correctly.

Suppose an online seller, Riya, sells goods worth ₹12,00,000 through an e-commerce portal in FY 2024-25. According to Section 194O, the platform deducts TDS at 0.1% (effective from 1st October 2024 as per Budget 2024). The TDS deducted is: 
 

So, Riya receives ₹11,98,800 in her account and ₹1,200 is credited to the government. In this blog, we will learn more about Section 194O of the Income Tax Act, its TDS rate, and filing and reporting requirements.

Who Does Section 194O Apply To?

Section 194O is applicable to e-commerce operators and e-commerce participants. The following table provides a brief overview of them:
 

E-commerce participants earn income through sales. On the other hand, e-commerce operators act as intermediaries responsible for deducting and depositing TDS. This division of roles prevents overlap in responsibilities.

TDS Rate And Amendments Of Section 194O

Earlier, Section 194O required deduction of 1% TDS on amounts payable to participants. However, as per Budget 2024, the rate has been reduced to 0.1%, effective from 1st October 2024.
 

• Individuals with PAN or Aadhaar: TDS is deducted at 0.1% for payments above ₹5,00,000.
   
• Sellers without PAN or Aadhaar: Under Section 206AA, TDS is applied at a higher rate of 5%.

You can see that the TDS rates differ based on your PAN or Aadhaar status and turnover. The following table gives a clear outline of TDS deduction rates under Section 194O:
 

The above-mentioned rate differences highlight the importance of providing a valid PAN or Aadhaar to avoid higher tax deductions. The table also shows that small sellers (sales less than ₹5,00,000) are protected under the turnover threshold.

Bonus Tip: Under Section 194O, TDS applies to the full invoice value. For example, a buyer pays ₹120, including product price (₹100), packaging (₹6), shipping (₹10), and convenience fees (₹4). So, the tax is deducted from ₹120, which is the gross sale amount.

Exemptions Under Section 194O

TDS under Section 194O does not apply to some sellers and types of transactions.These exemptions mainly reduce the burden on small sellers and avoid unnecessary double deductions. The following table highlights these exemptions:
 

The above-mentioned rules make sure that only relevant transactions come under TDS. They also bring clarity for operators, as they know exactly when to deduct tax.

How Is TDS Deducted By E-Commerce Operators?

A simple process is used by the e-commerce platforms to deduct TDS under Section 194O. The following table highlights the general steps taken by the operators to deduct TDS:
 

These steps ensure that the seller remains tax-compliant. Also, it helps the government capture tax at the source and reduces the chances of revenue leakage.

Filing And Reporting Requirements Under Section 194O

E-commerce operators must file and report TDS deducted under Section 194O regularly. The following are the requirements:

• Quarterly TDS deposit using Form 26Q.
   
• Issuance of Form 16A as a TDS certificate to sellers.
   
• Annual review to ensure accurate disclosure in the seller’s income tax records.

The following table reflects the filing deadlines for TDS:
 

It is necessary to file timely, so that the sellers receive proper credit for TDS deducted. Accurate filing reduces the chance of disputes between sellers and operators.

Conclusion

You may have understood the working of Section 194O in the Income Tax Act. This section plays an important role in bringing transparency to online transactions. 

Section 194O of the Income Tax Act helps regulate TDS on e-commerce transactions, promoting transparency and accurate reporting. While buyers are largely unaffected, sellers need to maintain proper records, link their PAN or Aadhaar, and comply with the rules to avoid penalties.

FAQs

1. Is TDS applicable on purchase of e-books?

No, TDS under Section 194O applies to payments made to sellers via e-commerce platforms, not for individual purchases like e-books by buyers.

2. Can TDS be claimed in ITR?

Yes, TDS deducted by e-commerce operators can be claimed as a credit while filing your Income Tax Return.

3. Who is exempted from e-filing returns?

Senior citizens more than 75 years of age are exempted from e-filing returns.

4. How much FD interest is tax free?

FD interest up to ₹50,000 yearly is TDS-free; beyond this, TDS is 10% or 20% without PAN.

5. What is the difference between TDS and TCS?

TDS (Tax Deducted at Source) is collected by the payer before making payment, while TCS (Tax Collected at Source) is collected by the seller from the buyer.

6. Who is an e-commerce operator?

An e-commerce operator is any person or platform that facilitates online sale of goods or services and collects payments on behalf of sellers.

7. Is Zomato an e-commerce operator?

Yes, Zomato qualifies as an e-commerce operator as it facilitates online food orders and collects payments on behalf of restaurants.

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