Clarification on S.194-O of Income Tax Act relating to tax withholding by e-commerce operator

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Clarification on S.194-O of Income Tax Act relating to tax withholding by e-commerce operator

Tejasvi

@tejasvi

January 5, 2024

Public Policy

As you are aware, S. 194-O of the Income Tax Act. 1961 (IT Act) requires an Ecommerce Operator (ECO) to deduct tax @ 1% of the gross amount of sales of goods/ provision of services/ both, facilitated through its digital or electronic platform.

The Central Board of Direct Taxes (CBDT) recently issued a Circular to provide following clarifications in relation to Tax Deduction at Source (TDS) under S. 194-O of the IT Act:

Where multiple ECOs are involved in a transaction –

The seller-side ECO who finally makes the payment or deemed payment to the seller of goods/ services shall be liable to deduct tax. However, if the seller-side ECO is the seller itself, then the ECO who finally makes payment to it shall be liable to deduct tax. This is in line with nasscom’s recommendation made to Ministry of Finance.

Inclusion of convenience fees, delivery fees and commission in the gross amount

In e-commerce transactions, it is common for sellers to charge the buyer additionally for shipping in the form of logistics/delivery/shipping/packaging fees, etc. Further, the buyer-side ECO and seller-side ECO may charge the seller a commission/convenience fee to enable the online transaction. The seller may choose to recoup all or part of that amount from the buyer. The CBDT has now clarified that shipping fee, delivery fees, packaging fees, commission or convenience fees shall form part of the gross amount on which TDS under S. 194-O will apply.

Further, payments made to the platform or network provider (such as ONDC) for facilitating the transaction would form part of the “gross amount” if they are included in the payment for the transaction. However, if these payments are being made on a lump-sum basis and are not linked to a specific transaction, then it should not be included in the “gross amount”.

Treatment of GST or other state levies and taxes

It has been clarified that where tax has been deducted at the time of credit of the amount in seller’s account and GST/ other state taxes are indicated separately in the invoice, then TDS under S. 194-O will apply on the amount credited without including such GST or tax component. This is in line with nasscom’s recommendation made to Ministry of Finance.

However, if the tax is to be deducted on a payment basis because the payment is made earlier than the credit, the tax would be deducted on the whole amount as it is not possible to identify that payment with GST or tax component of the amount to be invoiced in future.

Treatment of purchase returns

The tax is required to be deducted under S. 194-O at the time of payment or credit, whichever is earlier. Thus, before purchase-return happens, the tax must have already been deducted from that purchase. The CBDT has clarified that where seller has refunded the money against purchase return, then tax deducted earlier may be adjusted against next purchase by the same seller in the same financial year. However, where purchase return is replaced by the goods, no adjustment is required.

Treatment of discounts

Where seller gives the discount, the seller would reduce the price of the products sold or services provided, and TDS will apply on the reduced price
In case where buyer ECO or seller ECO gives discount, the seller usually receives full consideration for the product. The seller receives part of the amount from the buyer, and the balance is discharged to the seller by the buyer ECO or seller ECO, as the case may be. For example, if the price quoted by the seller is Rs 100, and the buyer ECO gives a discount of Rs 10, Rs 90 (i.e. 100 -10) will be collected from the buyer and remitted to the seller. The buyer ECO will pay the remaining Rs 10 to the seller via the seller ECO. The invoice for the buyer will be raised for Rs 100, and the seller-side ECO will, therefore, deduct tax on Rs 100, which is the gross amount of sales.

We hope you will find the update useful. In case you have any feeback, please write to tejasvi@nasscom.in

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Tejasvi