Section 194-O TDS on E-Commerce Transactions: CBDT Circular No. 20 of 2023: Clarifications for E-Commerce Operators
Background: Section 194-O and Its Applicability to E-Commerce Operators
Section 194-O was inserted into the Income Tax Act, 1961, by the Finance Act, 2020, effective from 1st October 2020. Under this provision, any e-commerce operator (ECO) responsible for making payments to an e-commerce participant in respect of the sale of goods or provision of services facilitated through its digital or electronic platform is required to deduct income tax at the rate of 1% of the gross amount of such sale or services.
An exemption applies for individual and HUF participants where the gross amount of sales or services during the previous year does not exceed INR 5 lakh, provided the participant has furnished their PAN or Aadhaar to the ECO. For all other participants and transactions exceeding the threshold, the TDS obligation under Section 194-O
is mandatory. Getting the computation of the “gross amount” and the identification of the deducting party right is critical; errors can result in disallowance under Section 40(a) and interest liability under Section 201 of the Act. Our
direct tax advisory services can assist e-commerce platforms and marketplace operators in assessing their Section 194-O obligations.
To resolve practical difficulties arising from the application of Section 194-O, the Central Board of Direct Taxes (CBDT) issued detailed clarificatory guidelines vide Circular No. 20 of 2023 (F. No. 370142/43/2023-TPL). The key clarifications are addressed below.
Q1: Who Must Deduct TDS When Multiple E-Commerce Operators Are Involved in a Transaction?
In transactions involving multiple ECOs, for example, where a buyer-side ECO and a seller-side ECO both participate in facilitating the same transaction, the question arises as to which ECO bears the TDS obligation.
The CBDT has clarified that where the seller-side ECO is not the actual seller, it is the seller-side ECO who ultimately makes payment to the actual seller that is liable to deduct TDS under Section 194-O. The deduction obligation rests with the entity making the final payment to the e-commerce participant, not with any intermediary
ECO in the transaction chain.
Q2: Are Convenience Fees, Commissions, and Logistics Charges Included in the “Gross Amount” for TDS?
Where the ECO charges a convenience fee or commission, or where the seller charges logistics and delivery fees in relation to the transaction, the CBDT has clarified that these amounts form part of the “gross amount” for TDS purposes under Section 194-O provided they are included in the payment for the transaction.
Illustration: A buyer purchases goods worth INR 100. The seller additionally charges INR 5 as packing fees, INR 10 as shipping fees, and INR 3 as a convenience charge. The seller issues an invoice for INR 118. Since the packing, shipping, and convenience charges are separately charged to the buyer in relation to the main supply, TDS under
Section 194-O is to be deducted from the total of INR 118.
Q3: How Are Purchase Returns Adjusted Against TDS Already Deducted?
Where TDS has already been deducted under Section 194-O before a purchase return occurs, the CBDT has clarified that the tax deducted may be adjusted against the next purchase made by the buyer from the same seller. Where the purchase return is replaced by an equivalent item, no adjustment is required.
Q4: How Are Discounts Treated When Calculating the “Gross Amount” Under Section 194-O?
The treatment of discounts for TDS purposes depends on who offers the discount:
- Discount given by the seller: Where the seller reduces the price of goods or services, the discounted price is the basis for TDS computation. For example, if the label price is INR 100 and the seller offers a discount of INR 10, TDS is computed on INR 90.
- Discount given by the buyer ECO or seller ECO: Where the buyer ECO offers a discount for example, collecting INR 90 from the buyer but remitting INR 100 to the seller (funding the INR 10 discount itself) the invoice to the buyer is raised for INR 100. In this scenario, TDS under Section 194-O is to be deducted by the seller ECO on INR 100, not on INR 90.
Q5: How Is GST Treated in Computing the “Gross Amount” for TDS Under Section 194-O?
The CBDT has provided the following guidance on the treatment of GST and other state taxes (such as VAT or sales tax) in the gross amount for TDS purposes:
- Where GST is separately indicated in the invoice, TDS is to be deducted from the amount credited, excluding GST.
- Where TDS is deducted on a payment basis (i.e., payment is received before the credit entry) and it is not possible to separately identify the GST component at the time of payment, TDS is to be deducted on the whole amount, including GST.
E-commerce operators should ensure their payment and accounting systems are configured to separately capture and report the GST component of each transaction to enable correct TDS computation. Platforms that cannot segregate GST at the time of payment will be required to deduct TDS on the full amount, which may create reconciliation challenges. Our corporate tax compliance team can assist in reviewing your platform’s TDS workflows against these requirements.
Contributed by:
Riya Bansal
Executive – Direct Tax
11th January 2024