If you’re struggling to figure out TDS payments for your e-commerce business, you’re not alone. On the bright side, you’ve landed at the right place. 

As more and more businesses are setting up online shops, it is essential for the IT Department to ensure that these businesses pay taxes on their income. Earlier, many small e-commerce businesses wouldn’t file their income tax returns. Now, Section 194O announced in the Union Budget 2020 brings all e-commerce businesses within the TDS ambit.

We’ve broken down everything you need to know about Section 194O introduced in the Finance Act, 2020, and how it can impact your e-commerce sales.

E-commerce Basics 

What is an e-commerce service 

Electronic commerce (e-commerce), or internet commerce, means buying and selling goods or services using the internet. Often, e-commerce is associated with the sale of physical goods online, but it describes any commercial transaction that is facilitated via digital or electronic networks. 

Who is an e-commerce operator 

An e-commerce operator manages, owns, or operates a digital or electronic platform like Shopify or Amazon for electronic commerce. 

Who is an e-commerce participant/seller

An e-commerce participant sells goods or services on an electronic platform via an e-commerce operator. 

What does TDS on e-commerce transactions mean

TDS (Tax deducted at source) on e-commerce transactions is defined as a percentage of the gross sales that the e-commerce operator is required to withhold and deposit to the Government. 

Now that we have the basics of an e-commerce transaction sorted, let’s understand section 194-O & its impact on e-commerce sales in detail. 

Tax Deducted at Source (TDS) under section 194O of the Income Tax Act, 1961

Law

The Finance Act 2020 dictates every e-commerce operator to deduct 1 % TDS (0.75% for FY 2020-21 applicable till March 31, 2021) of the gross amount of sales of the e-commerce participant. 

Note: TDS will not be applied to the GST component.

Time of TDS deduction

The e-commerce operator is required to deduct the TDS at the time of payment to the e-commerce participant.  

TDS rate

If the e-commerce participant is a resident Individual or HUF and the gross sales exceed Rs. 5,00,000 in the financial year, TDS will be deducted at the rate of 1% on Gross Sales. 

If the deductee does not provide the PAN or Aadhaar, then TDS shall be deducted at the rate of 5% irrespective of the gross sales amount.

TDS Certificate

The e-commerce operator is required to issue Form 16A to the e-commerce seller. This form can be used by the seller to claim credit of the tax deducted while filing the Income Tax Return.

TDS Return

After depositing TDS with the income tax department, the deductor should file Form 26Q on TRACES (TDS Reconciliation Analysis and Correction Enabling System) to report the details of the dividend payment. 

Example of TDS deduction for an E-commerce Business

Let’s say Sapna is a registered e-commerce seller on Shopify. Here are the details of her sales.

Gross sales = Rs. 5,20,000

GST @ 18% included in the above sales = Rs. 93,600

Shopify’s commission @ 2.9% = Rs. 15,080

TDS Calculation

E-Commerce Operator – Shopify

E-Commerce Seller – Sapna

TDS = 1% of 5,20,000 = Rs. 5,200

Shopify is required to, 

  • deduct TDS of Rs. 5,200 at the time of credit fulfillment or making payment, whichever is earlier. 
  • file TDS return via Form 26Q & issue form 16A to Sapna. 

If Sapna fails to furnish the PAN or Aadhar, then TDS should be deducted @ 5% irrespective of gross sales amount. 

Not sure what tax rate you’re subject to for your e-commerce product. Get GST inclusive and exclusive prices for your goods with a GST calculator.

Penalties Under Section 194O

If the deductor (E-commerce platform) fails to file and pay the TDS, they will bear the following penalties.

  • Interest at the rate of 1% per month or part thereof for non-deduction of TDS
  • Interest at the rate of1.5% per month or part thereof for non-payment of TDS by 7th of every month
  • Rs 200/per day for non-filing of TDS return on a quarterly basis

We hope this helped you understand how the TDS Section 194O will impact your e-commerce businesses. Subscribe to our weekly newsletter to stay updated about all the recent tax changes & their effect on your business.

Suhani Jain
Author

A potterhead finding magic in words | Content Marketer @ RazorpayX

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