Analysis of Section 194-O of Income Tax Act, 1961 (Applicable from 1st October, 2020)

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TDS on payment made by E-commerce operator to E-commerce participant

Section 194-O of Income Tax Act, 1961 has come into existence by Finance Act, 2020 in order to widen and deepen the tax net by bringing participants of e-commerce within tax net resulting increase in revenue to government.

Whole provision at a glance:

Person Liable to deduct TDS (Deductor) E-commerce operator (Resident/ Non Resident) such as Flipkart, Amazon etc.
Deductee E-commerce participant (a person resident in India selling goods or providing services through digital platform of Flipkart, Amazon etc).
Timing of deduction of TDS At the time of credit of amount of sale or services or both to the account of an e-commerce participant or at the time of payment thereof to such e-commerce participant by any mode, whichever is earlier,
Rate 1% of gross amount of sales or services (If PAN not available 5% as per Section 206AA)
No deduction by E-commerce operator Gross amount of sales or services does not exceed Rs. 5,00,000/- during a previous year in case of e-commerce participant being Individual or HUF and furnishes PAN or Aadhar No. to e-commerce operator.

 

Section 194-O in detail:

Bare Act Provision: 194-O(1) “Where sale of goods or provision of services of an e-commerce participant is facilitated by an e-commerce operator through its digital or electronic facility or platform (by whatever name called), such e-commerce operator shall, at the time of credit of amount of sale or services or both to the account of an e-commerce participant or at the time of payment thereof to such e-commerce participant by any mode, whichever is earlier, deduct income-tax at the rate of one per cent of the gross amount of such sales or services or both”.

Explanation

Case-1: Payment made by purchaser of goods or recipient of services to E- Commerce operator:

An e-commerce operator such as (Flipkart, Amazon) etc is required to deduct tax @ 1% of gross amount of sales or services, at the time of credit of amount of sale or service to the account of E-commerce participant i.e (a person resident in India sold the goods and provide services through digital platform of E-commerce operator) or at the time of payment to E-commerce participant whichever is earlier.

Example 1: Mr. Ram (e-commerce participant) is providing its services through Amazon (e-commerce operator). Mr. Shyam (customer) avails the services from Mr. Ram for Rs. 1,50,000/- on 1 October 2020 and makes the payment to Amazon. Amazon will credit the account of Mr. Ram on 1st October 2020 by Rs. 1,50,000/-, however makes the payment of Rs. 1,20,000/- on 3rd October after deducting his commission.

Flipkart is required to deduct TDS @1% on Rs. 1,50,000/- which is gross amount of services, at the time of credit to Mr. Ram on 1st October 2020 i.e 1,500/-.

Example 2: Suppose in Example 1, If Mr. Ram (e-commerce participant) provides discount of 10% on sales value of service of Rs. 15,000/- to customer, in this case invoice value will be (1,50,000-15,000 = 1,35,000/-). Amazon will credit Mr. Ram by Rs. 1,35,000/- and required to deduct TDS @1% on Rs. 1,35,000/- i.e Rs. 1,350/-.

Example 3: Miss Sheena (e-commerce participant) is selling its goods through Amazon (e-commerce operator). Mr. Shyam (customer) buys goods from Miss Sheena for Rs. 1,50,000+ 27,000 (GST) = 1,77,000/- on 1 October 2020 and makes the payment to Amazon. Amazon will credit the account of Miss Sheena on 1st October 2020 by Rs. 1,77,000/- and required to deduct TDS @1% on Rs. 1,77,000/- i.e Rs. 1,770/-.

Case-2: Payment directly made by purchaser of goods or recipient of services to E-commerce participant:

For the purposes of sec 194-O, any payment made by a purchaser of goods or recipient of services directly to an e-commerce participant for the sale of goods or provision of services or both, facilitated by an e-commerce operator, shall be deemed to be the amount credited or paid by the e-commerce operator to the e-commerce participant and shall be included in the gross amount of such sale or services for the purpose of deduction of TDS.

Example 4: Mr. Ram (e-commerce participant) is providing its services through Amazon (e-commerce operator). Mr. Shyam (customer) avails the services from Mr. Ram for Rs. 1,50,000/- on 1 October 2020 and makes the payment directly to Mr. Ram i.e E-commerce participant. As per explanation to section 194-O(1), Rs. 1,50,000/- shall be deemed to be the amount paid by e-commerce operator i.e Amazon to Mr. Ram i.e E-commerce participant irrespective of fact that customer has made the payment to E-commerce participant not to E-Commerce Operator and Amazon will require to deduct TDS@1% i.e 1,500/-.

What services includes and does not include

  1. Services” also includes “fees for technical services” and fees for “professional services”, as defined in the Explanation to section 194J.
  2. Service amount shall not include any amount or aggregate of amounts received or receivable by an e-commerce operator for hosting advertisements or providing any other services which are not in connection with the sale or services.

Exceptions (when TDS is not to be deducted)

Bare Act Provision: 194-O(2) “No deduction under sub-section (1) shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of an e-commerce participant, being an individual or Hindu undivided family, where the gross amount of such sale or services or both during the previous year does not exceed five lakh rupees and such e-commerce participant has furnished his Permanent Account Number or Aadhaar number to the e-commerce operator.”

Explanation

E-Commerce operator is not required to deduct TDS on amount of sales or services to E-commerce participant if E-commerce participant is individual or HUF and gross amount of sale or services or both during the previous year does not exceed Rs. 5,00,000/- and such e-commerce participant furnishes his Permanent Account Number or Aadhaar number to the e-commerce operator.

Example 5: Mr. Ram (e-commerce participant) is providing its services through Amazon (e-commerce operator). Mr. Ram made gross sale of services during the year of Rs. 4,50,000/-. Then E-commerce operator is not required to deduct TDS as Mr Ram is an individual and amount of sale of services does not exceed Rs. 5,00,000/- provided Mr Ram furnishes PAN / Aadhar to E-commerce operator.

Bare Act Provision: 194-O(3) “Notwithstanding anything contained in Part B of this Chapter, a transaction in respect of which tax has been deducted by the e-commerce operator under sub-section (1), or which is not liable to deduction under sub-section (2), shall not be liable to tax deduction at source under any other provision of this Chapter”

Circular No. 17 of 2020 dated 29th September, 2020 issued by CBDT on Guidelines under section 194-O of The Income Tax Act, 1961

CBDT issues Circular No. 17 on 29Th September, 2020 specifying some guidelines under section 194-O of The Income Tax Act, 1961. Hereunder we discuss those guidelines

1. Applicability on transactions carried through various Exchanges:

It has been represented that there are practical difficulties in implementing the provisions of Tax Deduction at Source (TDS) contained in section 194-O in case of certain exchanges and clearing corporations. It has been stated that sometime in these transactions there is no one to one contract between the buyers and the sellers.

In order to remove such difficulties, it is provided that the provisions of section 194-O of the Act shall not be applicable in relation to:

  1. transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation, including recognized stock exchanges or recognized clearing corporation located in International Financial Service Centre.
  2. transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC

For this purpose:-

(i) “recognized clearing corporation” shall have the meaning assigned to it in clause (i) of the Explanation to clause (23EE) of section 10 of the Act;

(ii) “recognized stock exchange” shall have the meaning assigned to it in clause (ii) of the Explanation 1 to sub-section (5) of section 43 of the Act; and

(iii) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005.

2. Applicability on payment gateway:

In e-commerce transactions, the payments are generally facilitated by payment gateways. It is represented that in these transactions, there may be applicability of section 194-O twice i.e. once an e-main commerce operator who is facilitating sell of goods or provision of services or both and once on payment gateway who also happen to qualify as e-commerce operator for facilitating service.

To illustrate

A buyer buys goods worth one lakh rupees on e-commerce website “Amazon”. He makes payment of one lakh rupees through digital platform of “Paytm”. On these facts liability to deduct tax under section 194-O may fall on both “Amazon” and “Paytm”.

In order to remove this difficulty, it is provided that the payment gateway will not be required to deduct tax under section 194-O of the Act on a transaction, if the tax has been deducted by the e-commerce operator under section 194-O of the Act, on the same transaction. Hence, in the above example, if “Amazon ” has deducted tax under section 194-O on one lakh rupees, “Paytm” will not be required to deduct tax under section 194-O of the Act on the same transaction. To facilitate proper implementation, “Paytm” may take an undertaking from “Amazon” regarding deduction of tax.

2.Applicability of on insurance agent or insurance aggregator:

It has been represented that insurance agents or insurance aggregators in many cases have no involvement in transactions between insurance company and the buyer for subsequent years. It has been represented that in subsequent years, the liability to deduct tax may arise on the insurance agents or insurance aggregators even if the transactions have been completed directly with the insurance company. This may result into hardship for the insurance agents/aggregators.

In order to remove difficulty it is provided that in years subsequent to the first year, if the insurance agent or insurance aggregator has no involvement in transactions between insurance company and the buyer of insurance policy, he would not be liable to deduct tax under section 194-O of the Act for those subsequent years. However, the insurance company shall be required to deduct tax on commission payment, if any, made to the insurance agent or insurance aggregator for those subsequent years under the relevant provision of the Act.

4.Calculation of threshold for the financial year 2020-21 for section 194-O of Income Tax act, 1961

Since section 194-O of the Act would come into effect from 1 sl October, 2020, it was requested to clarify how the threshold specified under section 194-O shall be computed and whether the tax is required to be deducted/collected in respect of amounts received before 1st October, 2020.

It hereby clarified that,-

Since the threshold of five lakh rupees for an individual/ Hindu undivided family (being ecommerce participant who has furnished his PAN/Aadhaar) is with respect to the previous year, calculation of amount of sale or services or both for triggering deduction under section 194-O of the Act shall be counted from 1 st April, 2020. Hence, if the gross amount of sale or services or both facilitated during the previous year 2020-21 (including the period up to 30th Sept 2020) in relation to such an individual! Hindu undivided family exceeds five lakh rupees, the provision of section 194-O shall apply on any sum credited or paid on or after 1st October, 2020 i.e TDS will be deducted on any sum credited or paid on or after 1st October.

 

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