TDS on E-commerce Sellers Under Section 194O

Short answer: Section 194-O of the Income Tax Act, 1961, mandates e-commerce operators (like Amazon, Flipkart) to deduct Tax at Source (TDS) at 1% on the gross amount of sales or services provided by a resident seller (e-commerce participant) through their platform. This TDS is deducted at the time of crediting the amount to the seller's account or at the time of payment, whichever is earlier.

What is Section 194-O of the Income Tax Act?

Section 194-O requires every e-commerce operator to deduct income tax from payments made to resident e-commerce participants who sell goods or provide services through its digital platform. Introduced to widen the tax base, this provision ensures that transactions routed through online marketplaces are brought into the tax net. The operator is responsible for deducting the tax and depositing it with the government, regardless of whether the buyer pays the seller directly or through the operator's payment gateway.

Who is responsible for deducting TDS under Section 194-O?

The responsibility for deduction lies solely with the "e-commerce operator". An e-commerce operator is defined as any person who owns, operates, or manages a digital or electronic facility or platform for the electronic sale of goods or provision of services. This includes major online marketplaces, food delivery aggregators, and platforms facilitating services like carpentry or beauty treatments. The seller, referred to as the "e-commerce participant," is the one from whose payment the TDS is deducted.

What is the rate of TDS under Section 194-O?

The prescribed rate of TDS under Section 194-O is 1% of the "gross amount" of sales or services. This rate applies if the seller has furnished their Permanent Account Number (PAN) or Aadhaar. If the seller fails to provide a valid PAN or Aadhaar, the e-commerce operator is required to deduct TDS at a much higher rate of 20% as per Section 206AA of the Act. For non-resident sellers, Section 194-O does not apply; however, other TDS provisions like Section 195 may be triggered.

Are there any exemptions or thresholds for Section 194-O?

Yes, a limited exemption is available. An e-commerce operator is not required to deduct TDS if the seller is an individual or a Hindu Undivided Family (HUF) and their gross amount of sales or services through that platform during the financial year does not exceed ₹5,00,000. For this exemption to apply, the seller must furnish their PAN or Aadhaar to the operator. This threshold does not apply to other types of sellers like partnership firms, LLPs, or companies; for them, TDS is applicable from the very first rupee.

How is the "gross amount" calculated for TDS deduction?

"Gross amount" refers to the total value of the sale of goods or provision of services, inclusive of any shipping fees, packing charges, or other amounts collected by the operator on behalf of the seller. However, it specifically excludes the Goods and Services Tax (GST) component, provided the GST amount is indicated separately on the invoice. This means TDS is calculated on the taxable value of the transaction, not the final invoice price including GST. The operator's commission is not deducted before calculating this gross amount.

Item	Included in "Gross Amount" for TDS?
Basic Sale Price of Product	Yes
Packing Charges	Yes
Shipping Fees collected from customer	Yes
E-commerce Operator's Commission	Irrelevant (TDS is on gross value before commission)
Central GST (CGST) / State GST (SGST)	No (if shown separately in the invoice)
Discounts offered by seller	No (TDS on net sale value after discount)

Worked example

Let's consider 'Bengaluru Handlooms', a sole proprietorship run by Mrs. Priya, selling sarees through an e-commerce platform 'IndianWeaves.com'.

• Seller: Bengaluru Handlooms (Proprietor: Mrs. Priya)
• E-commerce Operator: IndianWeaves.com
• Financial Year: 2025-26
• Total Sales of Sarees (ex-GST): ₹8,00,000
• GST collected (shown separately): ₹40,000 (at 5%)
• Total Invoice Value: ₹8,40,000
• IndianWeaves.com Commission: 15% on sale value (₹1,20,000)
• Mrs. Priya's PAN: Provided to the operator.

TDS Calculation:

1. Identify the Seller Type: Mrs. Priya is an individual.
2. Check the Threshold: Her gross sales are ₹8,00,000, which is more than the ₹5,00,000 exemption limit.
3. Determine the Applicable Amount: The "gross amount" for TDS is the sale value, excluding GST. So, the base for TDS is ₹8,00,000.
4. Calculate TDS: The TDS rate is 1% as PAN is provided.
   • TDS = 1% of ₹8,00,000 = ₹8,000.

Payment to Seller:

• Gross Amount Credited: ₹8,00,000
• Less: Commission (₹1,20,000)
• Less: TDS (₹8,000)
• Net Amount Paid to Mrs. Priya: ₹8,00,000 - ₹1,20,000 - ₹8,000 = ₹6,72,000

IndianWeaves.com will deposit ₹8,000 with the government and issue a TDS certificate (Form 16A) to Mrs. Priya. She can claim this ₹8,000 as a credit against her final tax liability when she files her Income Tax Return.

Common mistakes

1. Seller Not Providing PAN: Many small sellers forget to update their PAN on the e-commerce platform, leading to a high 20% TDS deduction, which severely impacts their cash flow.
2. Operator Incorrectly Calculating Gross Amount: Some operators might mistakenly include the GST component while calculating TDS, leading to excess deduction. TDS should be on the value exclusive of GST.
3. Seller Forgetting to Claim TDS: The amount deducted is a pre-paid tax. Sellers must check their Form 26AS or AIS and claim the full TDS credit while filing their ITR. Unclaimed TDS is a direct loss.
4. Misunderstanding the ₹5 Lakh Threshold: The exemption is only for individuals and HUFs. Partnership firms or companies cannot claim this benefit and are liable for TDS from the first sale.
5. Ignoring Direct Payments: The law clarifies that TDS applies even if the buyer pays the seller directly (e.g., Cash on Delivery handled by the seller). The operator is still responsible for deducting and depositing the tax.

How SP & SC helps

Navigating TDS rules can be complex for both e-commerce operators and sellers. At SP & SC, we provide end-to-end assistance. For e-commerce operators, we manage the entire TDS compliance lifecycle, from correct calculation and deduction to timely deposit and filing of TDS returns in Form 26Q. For sellers, we ensure the TDS deducted is accurately reflected in your tax records and fully claimed in your income tax return, maximising your net income. We handle any discrepancies or notices related to Section 194-O. For comprehensive TDS support, check our TDS Return Filing service.

Frequently asked questions

H3: What if the buyer makes the payment directly to the seller?

Even if the buyer pays the seller directly, for a transaction facilitated by the platform, Section 194-O mandates the e-commerce operator to deduct TDS. The law deems the operator as responsible for the payment and subsequent tax deduction.

H3: Is TDS under 194-O deducted on the GST component?

No. As per CBDT circulars, if the GST component is indicated separately in the invoice, TDS is not to be deducted on it. TDS is calculated only on the taxable value of goods or services.

H3: Can a seller apply for a lower TDS certificate under Section 194-O?

Yes, an e-commerce participant can apply to their Assessing Officer in Form 13 under Section 197 of the Income Tax Act for a certificate authorising the e-commerce operator to deduct tax at a lower rate or deduct no tax at all. This is typically granted if the seller's estimated final tax liability is lower than the TDS being deducted.

H3: Does Section 194-O override other TDS sections?

Section 194-O(3) clarifies that once tax is deducted under this section, no further tax shall be deducted on the same transaction under any other provision of Chapter XVII-B of the Act. However, this does not apply to any amount received by an e-commerce operator for hosting advertisements or for any other services which are not in connection with the sale of goods/services under this section.

H3: Does Section 194-O apply to non-resident sellers?

No, Section 194-O is applicable only to payments made to a resident e-commerce participant. Transactions with non-resident sellers are governed by different provisions, primarily Section 195 of the Income Tax Act.

Get a fixed-fee quote

Whether you are an e-commerce operator managing compliance or a seller trying to understand your tax obligations, our team of Chartered Accountants and tax lawyers can provide clarity and support. Share your documents with us for a confidential review, and we will provide a written, fixed-fee quote for our services. Contact SP & SC or message us on WhatsApp at +91 90356 74566. We handle all TDS, GST, and income tax matters end-to-end.