CBDT issues circular for the deduction of tax at source on e-commerce transactions under Section 194-O(4) of the Income-Tax Act.

The Finance Act, 2020 inserted section 194-O in the Income-Tax Act 1961 which mandates an e-commerce operator (ECO) to compulsorily deduct tax at the rate of 1% of the gross amount of sale of goods or provision of service or both, facilitated through its digital or electronic facility or platform.

Earlier, CBDT has issued two sets of guidelines to remove difficulties in the implementation of provisions of section 194-O. Vide this circular CBDT has further issued another set of guidelines to provide clarifications on some more issues.

Name of the Circular/Update : CBDT issues circular for the deduction of tax at source on e-commerce transactions under Section 194-O(4) of the Income-tax Act.

Date : December 28, 2023

Circular / Update Number : Circular No. 20/2023

Link for the Circular /Update : https://incometaxindia.gov.in/communications/circular/ciruclar-20-2023.pdf

 Brief of Provision :

The CBDT guidelines are summarised as follows:

Question 1-

Who should deduct tax at source where there are multiple e-commerce operators involved in a transaction?

There may be a platform or network [like Open Network for Digital Commerce (ONDC)] on which multiple e-commerce operators are participating in a single transaction for example there could be a buyer side ECO involved in buyer side functions and a seller side ECO involved in seller side functions. In such case there may be two situations:

• Where the seller side ECO is not the actual seller of the goods or services – the compliance under Section 194-O is to be done by the seller side ECO who finally makes the payment or the deemed payment to the seller for goods sold or services provided.
• Where the seller-side ECO is the actual seller of the goods or services – the compliance is to be done by the ECO which finally makes the payment or the deemed payment to the seller for goods or services sold

In both the above cases, the tax shall be deducted on the “gross amount” of such sale of goods or provision of services at the time of credit to the account of a seller or at the time of payment or the deemed payment thereof to such seller by any mode or whichever is earlier.

Question 2-

E-commerce operators may levy convenience fees or charge commissions for each transaction and sellers may levy logistics and delivery fees for the transaction. Payments may also be made to the platform or network provider for facilitating the transaction. Would these form part of the ‘gross amount’ for the purposes of TDS under section 194-O?  

The clarification is given in the form of the following examples:

Example 1 – A buyer purchases goods worth RS. 100 from a seller and opts for home delivery. The seller charges the buyer an additional RS.5 as packaging fees, RS.10 as shipping fees and RS.3 as a convenience charge (to recoup RS.1 charged by the buyer-side ECO and RS.2 charged by the seller-side ECO). In this case, the seller will issue an invoice for RS.118 to the buyer. The shipping fees, packaging fees and convenience fees are separately charged to the buyer to provide services in relation to the main supply. In such a case, the seller side ECO is required to deduct tax on RS.118 since this is the gross amount of sales.

In this example, fees charged by the seller-side ECO (RS.3 charged to the seller) and buyer-side ECO (RS.1 charged to the seller-side ECO) for services provided would ordinarily have been subjected to tax under section 194H and the seller and seller-side ECO respectively would have had to deduct tax and file TDS return with respect to the fees paid.

However, as the tax has been deducted under section 194-O on the gross amount of sales of RS.118, this amount of fees charged will not be subject to TDS under any other provision. However, this is subject to provisions of section 194S(4).

Payments may also be made to the platform or network (e.g. ONDC) provider for facilitating the transaction. These would form part of the ‘gross amount’ for the purposes of TDS under section 194-O if they are included in the payment for the transaction. If these payments are being paid on a lump-sum basis and are not linked to a specific transaction, then these need not be included in the ‘gross amount’.

Example 2 – The seller’s label price of a product is RS.85, the seller- side ECO’s fee (for listing the seller catalog and facilitating the transaction) is RS.10 and the buyer-side ECO’s fee (to provide an interface to enable the buyer to discover the seller/product and to enable them to place an order) is RS.5. The seller issues an invoice for RS.100 (gross amount) to the buyer. TDS under section 194-O will be calculated on RS.100 at the rate of 1%, and the responsibility of tax deduction and depositing the same would be on the seller ECO. The buyer and seller ECO’s fees will not be subject to further TDS under section 194H.

Question 3-

How GST, various state levies and other taxes such as Value-added Tax (VAT), sales tax, excise duty, etc. will be treated when calculating the gross amount of sales of goods or provision of services?

Under section 194-O, when tax is deducted at the time of credit of the amount in the account of the seller and the component of GST/various state levies and taxes is indicated separately, tax shall be deducted on the amount credited without including such GST/various state levies and taxes.

However, if the tax is deducted on a payment basis because the payment is earlier than the credit, the tax would be deducted on the whole amount as it would not be possible to identify the amount of GST/various state levies and tax components of the amount to be invoiced in future.

Question 4-

How will adjustment for purchase returns take place?

Tax must have already been deducted, before the purchase-return happens, under section 194-O on that purchase. In such a case, if the money is refunded, then the tax deducted may be adjusted against the next transaction by the deductor with the same deductee in the same financial year. Further, the tax deducted and deposited will be allowed as a credit to the seller. No adjustment is required if the purchase return is replaced by the goods since in that case the transaction on which tax was deducted under section 194-O is completed with the goods replaced.

Question 5-

How will discounts given by the seller as an e- commerce participant or by any of the multiple e- commerce operators be treated while calculating the ‘gross amount’?

• Seller discount – In the situation where the discount is given by the seller itself, the seller would reduce the price of the products sold or services provided. For eg.: if the label price of a product is RS.100 and the seller offers a discount of RS.10, RS.90 will be receivable from the buyer. In this case the seller will invoice the buyer for RS.90 and hence the TDS will be calculated on RS.90.
• Buyer ECO or seller ECO discount – In cases where the discount is given by the buyer ECO/seller ECO, usually the seller receives full consideration for the product, however, part of it is received from the buyer and the balance is discharged to the seller by the buyer ECO/seller ECO.For example, if a discount of RS.10 is given by the buyer ECO and if the price quoted by the seller is RS.100, buyer ECO will collect RS.90 from the buyer and remit it to the seller. Further, the buyer ECO will pay the remaining RS.10 to the seller via the seller ECO. The invoice on the buyer will be raised for RS.100 and tax will therefore be deducted by the seller-side ECO on RS.100, which is the gross amount of sales.