BAJAJ BROKING
July 07, 2025
4 mins read
Section 194O of the Income Tax Act was introduced through the Finance Act, 2020, and came into effect from 1st October 2020. When paying or crediting e-commerce participants for goods or services purchased through their digital platforms, e-commerce operators are required to deduct tax at source (TDS) under this section. The goal of the provision is to expedite tax collection for online transactions and guarantee timely tax deduction. By making e-commerce operators responsible for TDS compliance, the law enhances transparency and enables better monitoring of income generated through digital commerce. It also helps in widening the tax base and aligning with the government’s broader objective of digitising and formalising the Indian tax structure for improved compliance.
Section 194O of the Income Tax Act requires e-commerce operators to deduct tax at source (TDS) at a rate of 0.1% on the gross amount received by sellers for goods or services facilitated through their digital platform. This deduction must be made either at the time of credit to the e-commerce participant’s account or when the payment is made, whichever occurs earlier. The law applies regardless of whether the payment is routed through the e-commerce operator or directly paid by the buyer to the seller. In line with the larger goals of digitising compliance and enhancing the accuracy of income tax return filing, the provision guarantees that revenue received through digital transactions is recorded and taxed at the source.
These are entities that own, manage, or operate digital or electronic platforms enabling the buying and selling of goods and services. They act as intermediaries between buyers and sellers. Operators have the responsibility to deduct tax at source on behalf of sellers using their platform.
E-commerce participants refer to resident individuals, Hindu Undivided Families (HUFs), or businesses that offer goods or services through an e-commerce platform. They are subject to TDS under Section 194O if their annual gross sales exceed ₹5 lakh, provided valid PAN or Aadhaar is furnished. Sellers must report this income during income tax return filing.
The provision applies to transactions involving the sale of goods or provision of services through a digital or electronic platform, where the platform is operated by a resident e-commerce operator. It ensures the digital economy is brought under the tax net.
Only resident sellers who are individuals, HUFs, or entities using an e-commerce platform qualify. Non-resident sellers are excluded from the scope of Section 194O.
TDS is not required if the annual gross sales or services of an individual or HUF are below ₹5 lakh and PAN or Aadhaar is provided.
According to Section 206AA of the Income Tax Act, the TDS rate rises to 5% if the seller is unable to provide a valid PAN or Aadhaar.
The e-commerce operator is liable to deduct TDS, even if the payment is made directly to the seller by the buyer.
TDS must be deducted at the time of credit or payment, whichever is earlier.
The income must be declared by the seller during income tax return filing.
TDS is deducted either when the e-commerce operator credits the amount to the seller’s account or makes the payment, whichever is earlier. The deduction is calculated on the gross amount, including any delivery or shipping charges.
Section 194O was introduced to increase visibility and traceability of income earned through digital platforms. It enables the government to monitor e-commerce revenue flows efficiently.
By placing the responsibility of TDS deduction on the e-commerce operator, the provision aims to simplify compliance for sellers and prevent non-deduction at the seller’s end.
The law helps minimise revenue leakage by ensuring that tax is deducted at the source before the seller receives payment, thus reducing the chances of tax evasion.
It ensures a broader coverage of taxpayers, especially small sellers operating via digital platforms who were previously not captured under direct tax regulations.
This section aligns with the government’s broader objective of strengthening digital infrastructure and improving tax governance through technology-driven solutions.
Before the introduction of Section 194O, there was no specific provision in the Income Tax Act to govern TDS on e-commerce transactions. E-commerce sellers were only subjected to general TDS sections like 194C or 194J, depending on the nature of the service. However, this often resulted in underreporting of income, as many transactions conducted through digital platforms went untracked by tax authorities. The absence of a dedicated provision made it difficult to monitor revenues earned by sellers on these platforms. This regulatory gap led to inconsistent compliance and tax leakages. To address these concerns, Section 194O was introduced to bring e-commerce transactions into the tax framework by standardising TDS obligations. The section assigns responsibility to e-commerce operators for deducting TDS at the time of payment or credit to sellers. This change ensures better tracking, accurate income reporting, and improved accountability within the digital commerce space.
Particulars | E-Commerce Transactions | OIDAR Services |
Definition | Sale of goods/services through electronic platforms | Online information and database access or retrieval via the internet |
TDS Applicability | Covered under Section 194O | Not covered under TDS; governed by IGST for non-resident providers |
Buyer Location | Usually within India | Buyers are typically based in India, and sellers are based outside India |
Seller Residency | Indian residents only | Usually, non-resident digital service providers |
Tax Type | TDS applicable under the Income Tax Act | GST is applicable under the reverse charge mechanism |
Service Delivery Mode | Transactional – product/service delivery through e-platforms | Automated, cloud-based digital delivery through the internet |
Payment Flow | Through an e-commerce operator or directly from buyer to seller | Directly billed to Indian users by foreign OIDAR service providers |
Compliance Responsibility | E-commerce operator for TDS deduction and deposit | The Indian recipient is responsible for paying GST under reverse charge |
Section 194O provides a defined tax deduction structure for digital transactions, assigning TDS responsibilities to e-commerce operators. This simplifies compliance and ensures traceability of online earnings. Sellers are required to furnish valid PAN or Aadhaar details and monitor the ₹5 lakh exemption limit where applicable. It is crucial for sellers to account for such TDS deductions accurately in their books. During income tax return filing, they must report the income correctly to avoid discrepancies with Form 26AS. Overall, the provision encourages consistent tax compliance while ensuring transparency and accountability in the rapidly expanding digital commerce environment.
Disclaimer: This blog is for informational purposes only. It does not constitute tax, legal, or investment advice.
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Gross sales under Section 194O refer to the total amount earned from goods or services sold via an e-commerce platform. This includes delivery charges or service fees. The TDS is deducted on this full amount before any deductions or returns are accounted for.
Purchase returns do not affect the TDS amount deducted under Section 194O. TDS is applied on the gross transaction at the time of payment or credit. Any return adjustments must be accounted for during income tax return filing by the e-commerce participant.
The e-commerce operator is responsible for deducting TDS under Section 194O. This applies even if the payment is made directly to the seller by the buyer. The responsibility lies with the platform facilitating the transaction.
The applicable TDS rate under Section 194O is 0.1 of the gross transaction amount.
Section 194O covers sales of goods and provision of services made through a digital or electronic facility. It applies to any resident individual or HUF participating in the sale of products or services via an e-commerce operator.
Failure to comply with Section 194O can attract interest, penalties, and disallowance of expenses under the Income Tax Act. The e-commerce operator must ensure timely deduction and deposit of TDS to avoid these consequences.
E-commerce companies are required, under Section 194O, to deduct a tax of 0.1% as TDS on sales or services they facilitate. To ensure that earnings from digital platforms are properly integrated into the tax system and to facilitate timely tax reporting, this clause was established.
Income earned under Section 194O should be disclosed under 'Income from Business or Profession' in the income tax return. When submitting, sellers must compare their TDS deductions with the details in Form 26AS to prevent inconsistencies.
LDC refers to Lower Deduction Certificate. A seller can apply to the assessing officer for a certificate allowing deduction at a lower rate or no deduction under Section 194O, based on estimated tax liability.
As of now, there have been no significant amendments to Section 194O since its introduction. However, any future changes would be notified by the CBDT or the Ministry of Finance and incorporated into the applicable assessment years.
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