Selling online? Here's how Section 194O affects your earnings
24 Feb 2025

India's Income Tax Act added Section 194O to tackle taxation on e-commerce transactions.

This section requires e-commerce operators to deduct tax at source (TDS) on payments made to e-commerce participants.

Effective from Oct. 1, 2020, this provision is intended to increase transparency and ensure tax compliance in the fast-paced digital economy.

The scope of Section 194O
Scope

Under Section 194O, all e-commerce operators, including both Indian and foreign companies with business in India, are required to deduct TDS at the rate of one percent on transactions.

This is applicable to the sales or services made through electronic platforms.

Importantly, the individual or Hindu Undivided Family sellers with sales below ₹5 lakhs and who have furnished PAN or Aadhaar are not subject to this deduction.

Compliance requirements
Compliance

E-commerce operators need to deduct TDS and deposit it by the seventh day of the next month in which the transaction took place.

They are also required to file quarterly TDS returns, providing a comprehensive record of all transactions where TDS was deducted.

Non-compliance with these regulations can result in penalties and interest charges on the due tax amount.

Exceptions and exemptions
Exceptions

Certain exceptions are mentioned under Section 194O where TDS won't be deducted.

These include transactions where the buyer is already liable to deduct tax under some other section (like Section 194C for contracts), or where the payment is made directly by the buyer to an e-commerce participant without the involvement of an e-commerce operator.

Practical tips for e-commerce operators
Tips

In order to adhere to Section 194O, e-commerce operators need to maintain a clear and comprehensive record of all transactions.

It is essential to validate the sellers' PAN or Aadhaar to ascertain if they are exempted from TDS.

Establishing an automated system for TDS calculation and deduction can significantly simplify the process, minimize manual mistakes, and save time.