The Central Board of Direct Taxes (CBDT) has released a circular outlining the guidelines for deduction of tax at source under Section 194-O of the Income Tax Act. This section mandates that e-commerce operators deduct income tax at a rate of one percent on the gross amount of sales facilitated through their digital platforms. The purpose of this provision is to ensure effective tax compliance in the growing e-commerce sector. The guidelines provide clarity on how tax deductions should be handled in various transaction scenarios, especially where multiple e-commerce operators are involved.
Role of E-commerce Operators in Tax Deduction
E-commerce operators act as intermediaries between buyers and sellers on digital platforms. They facilitate the sale of goods or services by providing the infrastructure, payment mechanisms, and support required for the transactions. Under Section 194-O, these operators are responsible for deducting tax from the payments made to sellers. The tax deduction is calculated on the gross amount of sales, including the price of goods or services and certain additional fees related to the transaction.
Transactions Involving Multiple E-commerce Operators
In some cases, multiple e-commerce operators may be involved in a single transaction. This can happen on platforms like the Open Network for Digital Commerce (ONDC), where different operators provide interfaces for buyers and sellers separately. For example, a buyer-side operator might offer the user interface to the buyer, while a seller-side operator might provide a platform for the seller. In such cases, the circular clarifies that the seller-side operator who makes or is deemed to make the payment to the seller is liable to deduct tax at source.
If the seller-side operator is also the seller in the transaction, then the operator who makes payment to that seller-operator will have the responsibility to deduct tax. This provision ensures that the tax deduction obligation is assigned even when multiple parties are involved in the payment process.
Components Included in the Gross Amount for Tax Deduction
The gross amount on which tax is to be deducted includes not only the price of goods or services sold but also additional fees commonly charged in e-commerce transactions. These include convenience fees, delivery fees, commission charged by the e-commerce operators, and other charges such as logistics or packaging fees. If the seller charges the buyer separately for these costs, they still form part of the gross amount for tax deduction.
Additionally, payments made to platform or network providers facilitating the transaction will be included in the gross amount if these charges are directly linked to a specific transaction. However, lump-sum payments made to platforms that are not linked to any particular transaction need not be included in the gross amount.
Treatment of Discounts Offered by the Seller
When a seller offers a discount on the price of goods or services, the taxable amount for deduction of tax under Section 194-O is adjusted accordingly. For example, if the original price of a product is Rs 100 and the seller offers a discount of Rs 10, the amount receivable from the buyer will be Rs 90. The seller will raise an invoice reflecting the discounted amount of Rs 90. Therefore, the tax deduction must be made on Rs 90, which is the gross amount after discount. This treatment ensures that the tax deduction aligns with the actual transaction value realized by the seller.
This adjustment mechanism is rooted in the principle that tax should be deducted only on the actual consideration passing to the seller, rather than the notional or pre-discount value. Section 194-O’s objective is to ensure proper withholding of tax on real income credited or paid to the seller through the e-commerce operator. By deducting tax on the post-discount price, the legislation avoids over-withholding, which could otherwise lead to unnecessary cash flow constraints for sellers and potential disputes regarding refunds or adjustments.
However, it is essential to distinguish between discounts provided by the seller and those provided by the e-commerce operator (buyer-side or seller-side platform). In cases where the seller funds the discount, it reduces the amount receivable from the buyer, thereby lowering the gross sales consideration for the purpose of tax deduction. Conversely, if the discount is funded by an e-commerce platform, the seller still receives the full listed price, and tax must be deducted on that higher amount, as the discount is not borne by the seller but by the platform.
Practical compliance with this rule requires accurate documentation and clear identification of who bears the discount cost. Sellers should maintain detailed records, including invoices, discount agreements, and credit notes, to support the computation of tax deduction at source (TDS). For example, where a discount is reflected directly on the invoice, the gross taxable amount is visible. On the other hand, if discounts are provided post-invoice, sellers should issue proper credit notes to adjust the gross sales value for TDS purposes.
Accounting systems used by sellers and e-commerce operators must also be configured to capture these variations automatically, ensuring that the correct base value is used for TDS calculation. Failure to apply the rules correctly may lead to under-deduction or over-deduction, each carrying potential penalties or compliance burdens under the Income-tax Act. Under-deduction may result in disallowance of expenses or demands for differential tax along with interest, while over-deduction can lead to delayed recovery for the seller and administrative complexities in claiming refunds.
Treatment of Discounts Offered by E-commerce Operators
Discounts may also be provided by the buyer-side or seller-side e-commerce operators rather than by the seller. In these cases, the seller typically receives the full consideration as if no discount were given. The amount collected from the buyer is reduced by the discount, but the difference is paid to the seller by the e-commerce operator. For instance, if the seller’s quoted price is Rs 100 and the buyer operator provides a Rs 10 discount to the buyer, the buyer pays Rs 90, and the e-commerce operator pays the remaining Rs 10 to the seller through the seller operator.
The invoice raised to the buyer will be for Rs 100, the full quoted price. Consequently, the seller-side e-commerce operator must deduct tax on the gross amount of Rs 100, not the net amount received from the buyer. This approach prevents tax leakage on the discount amounts borne by the e-commerce operators.
From a compliance perspective, the rationale is straightforward: the seller is entitled to the entire Rs 100 in consideration for the sale, even if part of that amount is indirectly subsidized by the platform operator. Tax is therefore calculated on the full invoice value, ensuring that the government collects TDS on the total commercial value of the transaction. If TDS were calculated only on the reduced buyer payment (Rs 90), the Rs 10 funded by the operator would escape the tax net, leading to a revenue shortfall and potential compliance gaps.
In practice, this requirement places an administrative responsibility on e-commerce operators to correctly identify the nature of discounts in each transaction. Discounts directly funded by the seller may not require special treatment beyond regular TDS computation. However, discounts funded or co-funded by the platform must be included in the taxable base for TDS purposes. This calls for accurate contractual documentation and clear system tagging so that accounting teams can distinguish between seller-funded and operator-funded incentives.
Consider another example: A seller lists a product for Rs 2,000. As part of a festival promotion, the e-commerce operator offers a Rs 200 discount to buyers, bearing the cost itself. The buyer pays Rs 1,800, and the e-commerce operator pays the remaining Rs 200 to the seller separately. For TDS under Section 194-O, the gross amount on which tax is deducted will be Rs 2,000. At a 1% rate, the TDS will be Rs 20, which the operator deducts before remitting the balance to the seller.
This policy also aligns with the CBDT’s broader intent of embedding tax compliance seamlessly into the digital marketplace ecosystem. By making operators responsible for deducting tax on the total sale value, the guidelines reduce the scope for underreporting and ensure that government revenues are protected even in transactions involving complex promotional structures.
E-commerce operators, particularly those managing large-scale promotional campaigns or operating in multi-operator ecosystems like ONDC, should ensure that their payment and invoicing systems are capable of automatically applying these rules. This not only streamlines compliance but also minimizes disputes with sellers over tax deductions, helping maintain a transparent and predictable commercial environment for all parties.
Treatment of GST and Other Taxes
The guidelines also clarify how Goods and Services Tax (GST) and other state levies should be treated for tax deduction under Section 194-O. When tax deduction is made at the time the amount is credited to the seller’s account, and the GST or other tax components are shown separately in the invoice, the tax deduction should be on the amount credited, ,excluding the GST or other taxes.
However, if tax deduction occurs on a payment basis before the amount is credited—such as when payment is made in advance—it is not possible to segregate the GST or other tax components. In such situations, tax must be deducted on the entire amount paid, including GST or other taxes.
Adjustments Related to Purchase Returns
Section 194-O of the Income-tax Act, 1961, was introduced to bring e-commerce transactions under the ambit of tax deduction at source (TDS). It mandates that an e-commerce operator must deduct TDS at the rate of 1% (5% in certain cases for non-furnishing of PAN/Aadhaar) on the gross amount of sales or services facilitated through its digital or electronic platform. The deduction must be made at the time of credit of such amount to the seller’s account or at the time of payment, whichever is earlier. This provision ensures tax compliance in the growing digital marketplace and prevents revenue leakage for the government.
However, in practice, situations arise where goods sold through e-commerce platforms are subsequently returned by buyers. Since the TDS obligation arises before the actual delivery or finalization of the transaction — based on the initial credit/payment — it is possible that tax is deducted on a transaction that is later reversed. This creates a need for proper adjustment mechanisms to avoid an unfair tax burden on the seller.
The Central Board of Direct Taxes (CBDT), recognizing these operational challenges, issued guidance on handling TDS in case of purchase returns. The clarification states that when the seller issues a refund for the returned goods, the TDS already deducted for the original sale can be adjusted against future transactions with the same seller within the same financial year. This adjustment ensures that the seller does not suffer double taxation for the same income. It also reduces the administrative burden of claiming refunds through the income tax return process for amounts that are not truly income.
For example, if an e-commerce platform facilitates the sale of goods worth ₹50,000 in May, deducting ₹500 as TDS (1%), and the goods are returned in June, the seller can request that the TDS amount deducted be adjusted against future sales in the same year. This mechanism allows for efficient reconciliation between sales records and tax deductions.
However, the CBDT guidance also notes a specific scenario: if, instead of issuing a monetary refund, the seller replaces the returned goods with other goods of equivalent value, no TDS adjustment is required. This is because the original transaction value is effectively preserved — the consideration remains the same, albeit with different goods supplied. Therefore, the TDS already deducted continues to apply to the transaction in its adjusted form.
From a compliance perspective, both e-commerce operators and sellers must maintain accurate and up-to-date records of transactions, returns, replacements, and adjustments to ensure proper reporting in their TDS returns (Form 26Q). Proper documentation will be crucial in case of a tax audit or departmental inquiry. Additionally, periodic reconciliation of gross sales and TDS amounts with the Form 26AS statement will help detect any mismatches early.
Ultimately, Section 194-O and the related CBDT clarifications are designed to strike a balance between tax enforcement and fairness to taxpayers. While the provision ensures that digital transactions are subject to proper tax withholding, the adjustment rules for purchase returns ensure that sellers are not unduly penalized for commercial contingencies that arise in the normal course of business.
Responsibilities of E-commerce Operators in Tax Deduction
The CBDT guidelines emphasize that e-commerce operators have a clear responsibility to deduct tax at source under Section 194-O. This deduction must be performed at the time of payment or credit to the seller, whichever is earlier. The operator must deduct tax at one percent on the gross amount of sales facilitated through the platform. This responsibility ensures that tax collection is embedded within the transaction flow, increasing compliance and reducing tax evasion risks.
The provision is designed to integrate tax deduction seamlessly into the digital marketplace ecosystem, ensuring that sellers operating through e-commerce platforms are brought into the tax net. By mandating deduction at the source, the government not only ensures timely collection but also reduces the chances of revenue leakage. This is particularly relevant in the growing e-commerce sector, where transactions are numerous, dispersed, and often involve sellers with varying levels of tax compliance awareness.
In scenarios where multiple e-commerce operators are involved, the operator responsible for the final payment to the seller must deduct tax. This eliminates confusion and overlapping deductions in complex transactions involving networks like ONDC (Open Network for Digital Commerce). For instance, if a seller lists products on a platform that connects to another aggregator before reaching the final consumer, only the operator making the actual payment to the seller bears the responsibility of TDS deduction. This structured approach prevents duplication, which could otherwise complicate reconciliation for sellers and operators alike.
The guidelines also highlight that operators should maintain accurate transaction records, including details of payment dates, amounts credited, and the specific sellers involved. This record-keeping is not only essential for demonstrating compliance during audits but also for resolving disputes that may arise between sellers and operators regarding the timing or calculation of deductions. Maintaining transparency in these processes fosters trust between marketplace operators and sellers while ensuring alignment with statutory requirements.
Furthermore, the guidelines address cases where sales involve returns, cancellations, or other post-sale adjustments. Since the TDS obligation arises at the point of credit or payment, operators must be careful in managing such situations. If adjustments are needed, these should be done within the same financial year to prevent distortions in both the seller’s and operator’s tax records. Operators are encouraged to establish robust reconciliation mechanisms to match gross sales data with actual realizations after considering returns and cancellations.
Overall, Section 194-O, backed by the CBDT’s clarifications, places significant compliance responsibilities on e-commerce operators but also offers a clear framework to manage tax deductions efficiently. By clearly defining the point of deduction, the responsible party, and record-keeping obligations, the guidelines promote an organized approach to TDS in the digital marketplace environment. This structured compliance framework not only benefits the tax authorities but also supports the growth of the e-commerce ecosystem by reducing uncertainty and administrative disputes.
Impact on Sellers and Compliance Requirements
For sellers using e-commerce platforms, these guidelines bring clarity on the amounts subject to tax deduction. Sellers need to be aware that tax will be deducted from the gross amount, which includes the sale price plus applicable fees like commissions and delivery charges. Sellers should maintain proper documentation, including invoices that reflect discounts offered and charges included, to reconcile with the tax deducted by the operator.
Sellers are also required to incorporate these tax deductions in their income tax filings. Since the tax is deducted at source, sellers should ensure that the deducted amounts are properly credited to their accounts as tax paid. This will avoid discrepancies during tax assessments or refunds.
Treatment of Payments Between Operators and Sellers
The guidelines specify the flow of payments and corresponding tax deductions between various parties. If the e-commerce operator is also the seller, then the operator making the payment to that entity bears the responsibility for deducting tax. When payment is split between buyer-side and seller-side operators, the final payment to the seller is the point at which tax deduction must happen.
This ensures that tax deduction happens only once per transaction, regardless of the number of intermediaries involved. It also avoids multiple deductions on the same transaction, which could otherwise create complexities and disputes.
Clarifications on Payment Timing and Tax Deduction
The timing of tax deduction under Section 194-O is an important consideration. Tax must be deducted at the time the amount is credited to the seller’s account or at the time of payment, whichever is earlier. This means that even if the payment is not yet credited but has been made, the operator must deduct tax.
The guidelines clarify that this timing ensures that tax deduction occurs promptly and does not depend on delays in accounting or fund transfers. This reduces uncertainty and enforces timely tax collection.
Summary of Tax Deduction Process Under Section 194-O
The tax deduction process under Section 194-O involves e-commerce operators deducting tax at the rate of one percent on the gross amount of sales facilitated through their platforms. This gross amount includes the price of goods or services, convenience fees, delivery charges, commissions, and any other transaction-related fees when these are linked to the sale. The deduction is to be made at the time of payment or credit to the seller, whichever is earlier. This process ensures that tax is collected at the source, promoting compliance and reducing the chances of tax evasion in e-commerce transactions.
Key Points on Multiple Operators and Payment Responsibility
Where multiple e-commerce operators are involved in a single transaction, the operator who makes or is deemed to make the payment to the seller is responsible for deducting tax. If the seller is also an operator in the transaction, the obligation shifts to the operator who makes the payment to that seller-operator. This clarity helps prevent confusion and double deduction of tax in complex multi-operator transactions, especially in emerging digital commerce networks.
Handling Discounts, Taxes, and Returns
Discounts offered by sellers reduce the gross amount on which tax is deducted. Conversely, discounts given by e-commerce operators do not reduce the gross amount for tax deduction because the seller receives full consideration, albeit through split payments. GST and other state taxes are excluded from the tax deduction base if these are separately indicated on invoices and deduction occurs on credit. However, if tax deduction is made on an advance payment basis, the entire amount, including GST, is subject to deduction. Adjustments related to purchase returns are allowed where tax deducted on the original purchase can be adjusted against subsequent purchases in the same financial year, preventing tax duplication.
Implications for E-commerce Ecosystem and Sellers
These guidelines clarify the responsibilities of e-commerce operators and sellers, streamlining the tax deduction process under Section 194-O. For operators, this means establishing clear systems to track transactions, payments, and deductions accurately. Sellers must ensure proper invoicing and record-keeping to reconcile tax deductions with their income declarations. The measures aim to foster transparency, improve tax compliance, and adapt taxation to the evolving digital economy while minimizing disputes between stakeholders.
Conclusion
The CBDT guidelines for tax deduction under Section 194-O provide essential clarity on the responsibilities of e-commerce operators and the treatment of various transaction components in tax deduction. By mandating a one percent deduction on the gross amount of sales facilitated through digital platforms, including fees and commissions, the guidelines ensure a more transparent and compliant tax collection process. Clear rules regarding multiple operators, discounts, GST treatment, and purchase returns help prevent confusion and disputes in complex e-commerce transactions. These measures strengthen the tax framework in the digital economy and support smoother compliance for both sellers and operators.