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Who is excluded from 1% TDS applicable on Payments made to E-Commerce companies

The Finance Act, 2020 has established a new Section 194-O that elaborates on levying 1 percent on TDS payments made to e-commerce operators. Section 194-O is applicable when Residents or Non-Resident e-commerce operators make payments to e-commerce platforms in relation to the sale of goods and services. 

An e-commerce operator is defined as a person who holds, manages or operates a digital or electronic facility for the sale of goods and services. Also, e-commerce operators are responsible for making payments to any e-commerce participant on sale of such products or services. These products or services include sale of digital goods and services such as podcasting, blogs etc.

Who is excluded?

A threshold limit of Rs. 5 lakhs is applicable for only resident individuals and Hindu Undivided Family (HUF). What this means is that an e-commerce operator does not need to deduct TDS if the amount (paid or credited) to individuals or HUF during the financial year does not exceed Rs. 5 lakhs.

Non-resident e-commerce participants are excluded or exempted from Section 194-O.

Scope of TDS on E-commerce under Section 194-O

The responsibility of payment of TDS lies with an escrow account between the buyer and seller. In other words, TDS is to be handled by e-commerce providers for the facilitation service of selling provision or goods of service furnished by it through its digital or automated facility or platform.

E-commerce providers are expected to deduct TDS during the credit or return period, whichever is faster.

Moreover, this section provides that if a purchaser of goods or service has earned the payment immediately to the e-commerce associate, it shall be assumed that an adjustment has been performed by the e-commerce executive or that the account has been charged by the e-commerce operator and the same shall be calculated in the entire amount for deduction of tax.

If the e-commerce participant does not publish their Aadhaar or PAN card, TDS has to be deducted at the rate of 5 per cent, according to the provisions of section 206AA.

What if the e-commerce participant is a non-resident?

Let us take an example. An e-commerce participant firm called Trader Ltd, sells its products through Amazon. Ms. Lina purchased this product online from Trader for Rs. 10,000 on the 1st of April, 2020.

Amazon credits Trader’s account on the 1st of April, 2020, but the customer directly makes the payment to Trader on the 15th of April, 2020.

Here, Amazon is needed to deduct TDS @1 percent on Rs. 10000 at the time of credit to the party or make the payment, whichever comes first. In such a scenario, TDS has to be deducted on the 1st of April, 2020.

Other provisions of Section 194-O on e-commerce transactions

All other left-out provisions of the chapter TDS of the Act are applicable. This includes submission of TDS form, provision surrounding the payment of TDS, other provisions related to non-deduction or lower deduction/non-submission of return/non-payment post deduction would be applicable as stated in the Act. The introduction of section 194-O would result in the upliftment of revenue for the government by minimizing tax evasion.

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