TDS under Section 194-O reduced from 1% to 0.1%: what the CBDT's new guidelines mean for e-commerce

Effective from 1 October 2024, the TDS rate under Section 194-O has been reduced from 1% to 0.1% on the gross amount of sales of goods or provision of services facilitated by an e-commerce operator (ECO).

The Central Board of Direct Taxes had previously issued guidelines clarifying the application of this provision. In response to industry representations, additional clarifications have now been provided to address complexities in multi-ECO transactions, additional service charges, GST treatment, purchase returns and discount adjustments. We at KRC have analysed and summarised the key provisions of the circular.

1. TDS where multiple e-commerce operators are involved

With the rise of platforms such as the Open Network for Digital Commerce (ONDC), multiple ECOs may be involved in a single transaction, leading to ambiguity about who is responsible for TDS.

Scenario 1: the seller-side ECO is not the actual seller

The ECO making the final payment to the seller (or deemed payment) is responsible for deducting TDS at 0.1% on the gross sale value.

Scenario 2: the seller-side ECO is the actual seller

When the seller itself is an ECO, the buyer-side ECO provides the interface and the seller-side ECO interacts directly with buyers. The ECO making the final payment to the seller must deduct TDS at 0.1% on the total sales amount.

2. TDS on additional charges

TDS must be deducted on the gross amount invoiced to the buyer. Any charges levied by the seller, the seller-side ECO or the buyer-side ECO, such as packaging, logistics and convenience fees, are included in the taxable base.

Illustration. A buyer purchases goods worth ₹100 and pays packaging of ₹5, shipping of ₹10 and convenience fees of ₹5, for a total invoice of ₹120. TDS under Section 194-O is deducted on ₹120 at 0.1%.

3. No double TDS on ECO service fees

If TDS under Section 194-O applies, no additional TDS applies under other sections such as 194H, except for virtual digital assets under Section 194S. A lump-sum fee charged by an ECO that is unrelated to specific transactions is not included in the TDS base.

Illustration. A seller lists a product at ₹85; the seller-side and buyer-side ECOs charge ₹10 and ₹5. The seller invoices the buyer ₹100 and TDS is deducted on ₹100 at 0.1%.

4. Treatment of GST and other indirect taxes

GST separately mentioned in the invoice is excluded from the gross amount for TDS if the deduction is made at the time of credit. If tax is deducted on a payment basis because payment precedes credit, tax is deducted on the whole amount, since the GST component of a future invoice cannot be identified.

5. Adjustment of TDS on purchase returns

If goods are returned after TDS has been deducted, the TDS can be adjusted against the next purchase from the same seller in the same financial year. Where the purchase is replaced rather than refunded, no adjustment is needed.

Illustration. A seller sells goods worth ₹10,000 and ₹100 TDS is deducted. If the buyer returns goods worth ₹6,000, the seller can adjust ₹60 against a future sale to the same buyer in the same financial year.

6. Discounts given by the seller or the ECO

Where a seller provides a direct discount, TDS applies to the net invoiced amount. Where the discount is funded by an ECO, the seller receives full consideration and TDS applies to the full gross amount before discount.

Illustration. A product is listed at ₹100 and the buyer-side ECO gives a ₹10 discount. The buyer pays ₹90 and the ECO pays ₹10 to the seller. TDS applies on ₹100 at 0.1%.

KRC's view

The additional clarifications are a welcome move. They provide certainty on TDS treatment in multi-ECO transactions such as ONDC, prevent double taxation on service fees charged by ECOs, ensure fairness in the treatment of discounts, clarify GST applicability and allow adjustments for purchase returns, all of which simplify compliance.