Updated on: Jul 3rd, 2024
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3 min read
The Finance Act 2022 introduced Section 194R, which pertains to the deduction of tax on benefits or perquisites provided to a resident in respect of businesses or professions.
Businesses, companies, or entities often extend multiple types of benefits and perquisites to their distributors, channel partners, agents, or dealers to incentivise and motivate them to promote further growth of a business. A few examples would include travel packages, gift cards or vouchers, products under incentive schemes or the usage of business assets, among others.
The purpose of introducing the new Section 194R is to plug the possibility of tax revenue leakages (tax evasions) in businesses or professions. A few companies claimed expenses for business promotions while offering various gifts, perks, perquisites, or benefits to its distributors, dealers, or channel partners (on fulfilments of conditions of under agreement or as per prevalent norms/traditional practice followed over the years by the business entity) under Section 37 of Income-tax Act, 1961.
For instance, an electronics manufacturing company gave LCD televisions as incentives to those channel partners who achieved a particular revenue target. The company included these as expenses in its profit and loss account and claimed an Income Tax benefit.
The recipients do not report this in their income return because this particular incentive is in kind and not in cash. This leads to incorrect income furnishing. Ideally, such an incentive or benefit in kind should be disclosed as income under the Income-tax Act, 1961 (ITA).
As per Section 28 (iv) of the ITA, the value of any benefit or perquisite—whether convertible into money or not—arising from business or in a profession is to be charged as business income in the hands of the recipient of such benefit or perquisite.
Now, under Section 194R, if a business gives its distributors or channel partners any such perquisites or incentives, which is partly in cash or kind, then they are required to deduct a TDS. In case the benefit is wholly in kind, the person providing such a benefit or perquisite is required to pay TDS on the value of such benefit or perquisites out of his own pocket.
So, the purpose of Section 194R is to widen the tax base and plug any scope of tax evasion.
To cite another example, in case a medical professional receives free samples, it has to be shown as a benefit or perquisite and is income. This is irrespective of the fact that the pharmaceutical company is using it as a sales promotion technique. The pharma company can claim a deduction for such a sales promotion. However, in the hands of the receiver, the promotion would be a taxable income, and TDS is required to be deducted by the pharma company on the same.
The TDS to be charged under Section 194R is 10%, which will come into effect from July 1, 2022. It applies only to resident recipients (receivers) of benefits or perquisites.
However, Section 194R is not applicable where the aggregate value of the benefit or perquisite to one beneficiary does not exceed Rs. 20,000 during the financial year (FY).
Also, it is not applicable for an individual or Hindu Undivided Family (HUF) to deduct TDS where total sales do not exceed Rs.1 crore in the case of business or Rs.50 lakh in the case of the profession in the immediate preceding financial year.
Any individual providing any benefit or perquisite to a resident, whether convertible into money or not, arising from business or the exercise of a profession by such resident shall—before providing such benefit or perquisite, as the case may be to such resident—ensure that tax has been deducted.
In simple terms, under Section 194R, the TDS applies to any resident who is providing any benefit or perquisite to another resident. The benefit has to be in kind or cash and could be arising from business promotions.
This section applies when any business, company, or professional gives perks, gifts, incentives, or any other benefits (monetary or non-monetary) in cash, kind, or partially in cash and kind to a person exceeding Rs.20,000 during the financial year.
When a business, company or professional gives benefits or perquisites to an agent, dealer, channel partner, distributor or any other person during the financial year, the business, company or professional is liable to deduct TDS under Section 194R.
TDS should be deducted and paid by the company, business or professional who provides benefits or perquisites before giving such benefits or perquisites.
Such deducted TDS needs to be paid by 7th of succeeding month.
However, the question is since the payment is ‘in kind’, how will the TDS be deducted on such a non-monetary transaction ?
CBDT has issued a clarification with its circular dated 16th June 2022 for any difficulty arising under the provision of section 194R with multiple examples.
As per this value of perquisites will be calculated based on the fair market value of the benefits except in the following cases
The deductor will issue a quarterly TDS certificate to the deductee in Form 16A. The deductor can download Form 16A from the TRACES account, and the deductee can view it in their 26AS. The deductor liable to deduct tax under Section 194R should file quarterly returns in Form 26Q.
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Section 194R in the Finance Act 2022 requires TDS deduction on benefits or perquisites given to residents for businesses or professions. It aims to prevent tax evasion in such scenarios, where gifts, perks, or incentives are provided. The section applies to residents providing benefits exceeding Rs. 20,000, with a 10% TDS rate starting July 1, 2022. A TDS certificate will be issued to recipients quarterly.