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TDS And TCS Provisions Applicable To E-Commerce Operators w.e.f. 1st October 2020

There has been significant growth in e-commerce activities in the Indian market over the last few years. This has resulted in a substantial increase in the number of sellers of goods and services. To widen the existing tax base, the Central Government announced a new provision in the 2020 Union Budget and Section 194-O of the Income Tax Act, 1961 was introduced in the Finance Bill 2020.

In this article, you will be able to understand:

What Is Section 194-O?

According to Section 194-O, “Notwithstanding anything to the contrary contained in any of the provisions of Part B of this Chapter, where the 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 oṣperator shall, at the time of credit of the 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”.

Essentially, Section 194-O requires the E-Commerce Operators to deduct Income Tax at source on the seller or service provider (“E-Commerce Participant”) who uses their E-Commerce platform at the rate of 1% of the gross sale of goods or services or both. The deduction is required at the time of credit or payment of the amount, whichever is earlier, for such sale of goods or services or both by the E-Commerce operator to the E-Commerce participant.

What Are The Various Exemptions Available Under Section 194-O?

The following exemptions are available:

  1. A resident individual or HUF whose gross sale amount from goods or services or both does not exceed INR 5 lakhs during the financial year and has furnished their PAN or Aadhar to the E-Commerce Operator.
  2. Where tax has been deducted at source under Section 194-O by the E-Commerce Operator on the E-Commerce Participant, then such E-Commerce operator shall not deduct tax at source under any other provisions in the Income Tax Act, 1961 on the E-Commerce Participant.
  3. This section is not applicable on any amounts received or receivable for hosting advertisements or any other services unrelated to the sale of goods or services or both.
  4. Since the section defines an E-Commerce participant as a resident in India, any non-resident who uses the E-Commerce Platform is not included in the scope for deduction of tax at source.

What Are The Guidelines Issued By The Income Tax Department?

On 29 September 2020, the Income Tax Department issued Circular No. 17/2020 providing specific guidelines and clarifications concerning Section 194-O of the Income Tax Act 1961:

  1. The provisions of Section 194-O will not apply to a transaction in securities or commodities traded through recognised stock exchanges or cleared and settled through clearing corporations situated in the International Financial Service Centre.
  2. Transactions in electricity, renewable energy certificates and energy-saving certificates traded to power exchanges registered under regulations of the Central Electricity Regulatory Commission will also be excluded from the provisions of Section 194-O.
  3. Most e-commerce operators use payment gateways to facilitate payments from customers. It has been clarified that Payment Gateways are not required to deduct tax at source under Section 194-O even though they may qualify as E-Commerce Operator for facilitating the service. A Payment Gateway may obtain an undertaking with this regard from the E-Commerce Operator.
  4. Insurance agents or insurance aggregators (Policybaazar, etc.) are typically involved only at the time of sale of an insurance policy. In subsequent years, the renewal premium is transacted between the Insurance Company and the Policyholder. In such cases, the Income Tax Department has clarified that Insurance Agents or Insurance Aggregators are not required to deduct tax at source on renewal premium where there is no involvement of agents or aggregators in the transaction. However, it is noted that Insurance Company is still responsible for deducting tax at source on the commission payable or paid to the Insurance agent or Insurance aggregator on the renewal premium collected from policyholders under Section 194D of the Income Tax Act 1961.
  5. The threshold of INR 5 Lakhs applicable to resident Individual and Hindu Undivided Family shall be calculated from 01 April 2020 even though the provisions of Section 194-O are applicable from 01 October 2020.

Other Points To Consider

  1. If an E-Commerce participant does not furnish their PAN, then the E-Commerce operator is required to deduct tax at source at 5% instead of 1% under Section 206AA of the Income Tax Act 1961.
  2. The provisions of Section 194-O apply to both resident and non-resident E-Commerce Operators. (As mentioned earlier, a non-resident E-Commerce Participant is not included in the scope for deduction of tax at source)
  3. The current provisions of Section 194-O do not consider sales returns to be reduced from the gross sale amounts. Given the nature of the E-Commerce industry, this may cause some strain on the E-Commerce Operators and E-Commerce Participants. A clarification is necessary.
  4. When there is deep discounting from E-Commerce Operators, it is unclear as to on which amount the tax will be deducted at source. For Eg., The price of a product set by the E-Commerce Participant (A) may be INR 100, and the E-Commerce Operator (B) includes a discount of INR 25 on the product on the Platform. A buyer (C) purchases the product for INR 75 and remits the amount to B. B remits INR 100 to the A (assuming no commission charged). In this case, the question arises whether B is required to deduct tax at source on INR 100 or INR 75. The Government is yet to clarify the provisions in this regard.
  5. An E-Commerce Operator is required to deduct tax at source even if the payment is not routed through the E-Commerce Operators platform or payment gateway.

Practical Example with TDS under Income Tax and TCS under GST

In an earlier article, we had discussed the applicability of TCS provisions under GST for E-Commerce Operators. Let us look at one example and discuss the TDS and TCS provisions applicable to E-Commerce Operators:

During October 2020, DEF private limited (E-Commerce Participant) had sales of INR 10,00,000 + 18% IGST through the E-Commerce Platform of A Limited (E-Commerce Operator). There is no commission charged by A Limited. There were sales returns of INR 1,00,000 + GST during October 2020.

Particulars Income Tax Act GST
Gross Sales Amount INR 10,00,000

(Sale amount excluding GST)

INR 9,00,000

(Sale Amount – Sales Returns, excluding GST)

TDS / TCS INR 10,000

(1% on Rs. 10,00,000)

INR 9,000

(10.00,000 – 1,00,000 = 9,00,000. GST at 18% is INR 1,62,000 and TCS at 1% is INR 9,000)

Entries in the books of accounts of E-Commerce Operator

  • At the time of sale
Bank Account Dr Rs. 10,62,000
    To DEF Private Limited Account Rs. 10,62,000
(Being funds received for the sale of goods, net of returns on behalf of DEF Private Limited)
  • At the time of remittance to the E-Commerce Participant (Assuming in the same month of the sale)
DEF Private Limited Account Dr Rs. 10,62,000
      To Bank Account Rs. 10,43,000
      To TDS Payable Rs. 10,000
      To TCS Rs. 9,000
(Being funds received for the sale of goods on behalf of DEF Private Limited, net of TDS and TCS)
  • At the time of remittance of tax to Government
TDS Payable Dr Rs. 10,000
      To Bank Account Rs. 10,000
(Being TDS remitted to Income Tax Department
TCS Dr Rs. 9,000
      To Bank Account Rs. 9,000
(Being TCS remitted to Department)