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All about Section 194 O of Income Tax Act 1961

All about section  194 O of income tax act 1961

Finance Act 2020 introduces a new section 194O for deducting the TDS of e-commerce participants. This section would be applicable from 01.Oct.2020.

Kindly find below detailed analysis of section:

Background

With the increasing number of people buying and selling goods online, govt decided to tax those escaping loopholes or escaping liability by non-reporting or under-reporting of income. Govt introduced TCS provisions under section 52 of CGST act 2017, casting responsibility on e-commerce operators to levy TCS on e-commerce participants. However, since small taxpayers are not registered in GST, the government was not able to trace their income from business or profession from the online sale of goods or services. So, they inserted section 194 O under income tax 1961.

Applicability:

It is applicable to E-commerce participants being resident i.e non-residents wouldn’t be covered under these provisions and tax won’t be deducted from non-resident e-commerce participants.

Deductor:

Deduction under this section is to be made by an e-commerce operator. Here, an e-commerce operator includes both residents and non-resident. Therefore, responsibility has been cast on non-residents also. Non-residents e-commerce operators already have to collect equalization levy at 2 percent w.e.f 01.04.2020 from online sales of goods or services in India. This would further add to there compliance burden.

Tax deduction rate

Tax is to be deducted at 1 percent on gross sales or receipts. Whether sales include tax such as GST is yet to be clarified. The same issue also arose at the time of TCS under section 52 of the CGST Act where sales were defined to include all taxes but an explanation 1 was inserted to clarify that sale or receipts would exclude tax components for this part.
Further, the TDS rate would be increased to 5 percent if no Aadhar/ PAN details are provided by resident individual or HUF. A subsequent amendment in section 204 of income tax has been made.

Exemption:

The exemption would be given to Resident individual or HUF, where there gross sales or receipts don’t exceed 5 lakhs in a year, however, to avail such exemption, they must submit aadhaar / pan details.
It means other than individual or HUF, TDS would be deducted irrespective of any limit. This would further burden e-commerce operators for keeping data of all such participants.

Deeming provision:

TDS has to be deducted at the time of credit or at the time of payment by the e-commerce operator to e-commerce participant, which e-commerce operator has collected on behalf of participants.
However, there have been cases where payment is directly received from the customer by e-commerce participants, in such cases, it would be deemed that payment is collected by e-commerce operator and tax would be deducted by the e-commerce operator. However, how TDS would be deducted in this particular case has to be seen.
Strangely, under TCS, there is no deeming provision, rather such cases are the outside purview of TCS under the GST act.

Important notes:

If TDS deducted under section 194 O, no TDS would be deducted under Chapter XVII- B of the act. In simple terms, if any TDS deducted under 194 O, no TDS to be deducted 194 J, 194C.
Also, one big relief  under section 194 O(3) is that if you are exempt from the purview of section 194 O ie individual or HUF having sales or receipts less than 5 lakhs, they would also be  exempt from provisions of section 194J, 194C
However, service fees or commission that e-commerce operator charge from participants would not be exempted, i.e e-commerce participants would still have to deduct TDS of e-commerce operator under 194H or 194J.

Definition

E-commerce operator:

An e-Commerce operator is a person who owns, operates, or manages a digital/electronic facility for the sale of goods and services. He is responsible for making payments to the e-Commerce participant on such sales.

E-commerce participants:

 An e-Commerce participant is a person who sells goods, services, or both through an electronic facility provided by an e-commerce operator. He must be a resident of India.

Conclusion:

The compliances for E-commerce operators are increasing day by day. Govt is trying it’s best to increase the base of taxpayers, who till now have been outside the ambit of taxation.
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