Section 194R Of Income Tax Act: Implementation Guidelines

Section 194R provides for TDS deduction for any benefit or perquisite provided in the course of business or profession. Let's understand the provisions of section 194R in this article.   

Scope And Coverage Of Section 194R

• The deductor is not required to check whether the benefit or perquisite is taxable in the recipient's hands under any of the provisions of the Income Tax Act.
• There is no requirement to check whether the amount itself is taxable or not
• Section 194R of the ITA applies in all cases where the benefit or perquisite is:
  • Wholly in cash
  • Wholly in kind
  • Partly in cash and partly in kind
• Benefit or perquisite can also include a capital asset (for example, car, land, etc.)

TDS Rate

As per section 194R of the Income Tax Act 1961, TDS should be deducted at 10% only if the total value of the gifts or perquisites given is more than INR 20,000 for every recipient during a financial year.

Who Should Deduct TDS u/s 194R? 

• Every person who is other than - Individual and HUF who is not liable for tax audit should deduct TDS when he provides any benefits or perquisite to a resident. 

Sales Discounts, Cash Discounts, And Rebates

• Sales discounts, cash discounts, and rebates allowed to customers from the retail price represent a lesser realization of the sale price itself. To that extent, the purchase price is also reduced. Logically, these are benefits, but to remove the potential difficulty for the seller, no TDS is deducted on sales discounts, cash discounts, or rebates allowed to customers.
• Freebies provided on purchases of some items (for example, buy 4 get 1 free) are not to be subjected to Section 194R
• However, Section 194R applies here:
  • When a person gives incentives (other than a discount or rebate) in cash or kind such as a car, television, computer, gold coin, mobile phone, etc.
  • Sponsoring a trip for the recipient and their relatives upon achieving specific targets.
  • Providing a free ticket for an event.
  • Providing free medical samples to doctors.

Valuation Of Perquisite Or Benefits 

Ambiguity arises on the value of the perquisite from which TDS needs to be deducted because under this section, benefits are often provided in kind. When the benefit is provided fully in kind, its value can be arrived through any the following means:

• Generally the Fair Market Value of the benefit can be taken for calculating TDS on the non-monetary benefits.
• When the provider purchases and gives it to the recipient - value of the benefit provided can be purchase price.
• When the provided manufactures the item and gives it to the recipient - value of the benefit can be selling price of the benefit if it was sold to third party customers.
• Goods and Services Tax (GST) will not be included for valuation purposes

Social Media Influencer

As per the guidelines, determining if there is a benefit or not will depend on the facts of the case:

• If the product given to the social media influencer was returned, there is no benefit and, hence, no TDS u/s 194R
• However, if the product was retained, then it would be like a benefit or perquisite

Reimbursement Of Out-of-pocket Expenses 

• If any expenditure (the liability of the person carrying on business) is met by or reimbursed by some other person, then the same would be regarded as a benefit or perquisite for the person who had the primary liability of incurrence. For example, travel expenses reimbursed by the consultant’s client would be regarded as a benefit or perquisite liable for TDS.
• However, there is no requirement for TDS if travel bills are in the name of the client, paid by the consultant, and reimbursed by the client.
• If the expenses are considered as a part of consideration and TDS already deducted under other sections (like 194C or 194J), then no need to deduct TDS under this section.

Dealers’ Conferences

• Guidelines mention that expenditure pertaining to dealer/business conferences will not be considered as a benefit or a perquisite if such conferences are held with the primary object of educating dealers/customers on the following:
  • Launch of a new product
  • Obtaining orders from dealers/ customers
  • Teaching new sales techniques to dealers
  • Addressing queries from dealers
  • Reconciliation of accounts

However, if such a conference is like incentives/benefits to select dealers/customers who have achieved particular targets, TDS u/s 194R needs to be deducted.

Also, expenses attributable to a leisure trip, leisure component for sponsoring family members or for priority stay or overstay are liable for TDS.

Tax Remittance When TDS Could not be Deducted 

There can be a situation when the benefit is provided entirely in kind. Or partly in cash and partly in kind, and the deductor cannot deduct TDS on the cash part because the cash part is less than TDS amount. Even in that case, the deductor needs to ensure that tax is remitted to the government at 10%. 

He can exercise any of the following precautions to ensure the same.  

• The recipient may pay the tax in advance tax and provide a declaration and copy of advance tax challan to the deductor.
• The deductor can collect TDS amount and remit the same to the government.
• He can even pay TDS out of his own pocket.

Computing Threshold Of Rs 20,000

• To check the threshold of Rs 20,000, we should include the benefit or perquisite provided on or before June 30, 2022
• No TDS is required to deduct on the amounts paid from April 1, 2022, to June 30, 2022

Example 1: An individual is provided benefits of Rs 8,000 up to June 30, 2022. Furthermore, benefits provided on or after July 1, 2022, up to March 31, 2023, are Rs 15,000.

For calculation of threshold, both the benefits needs to be considered. Since the total sum exceeds Rs 20,000, TDS needs to be deducted u/s 194R. For calculation of TDS amount, only benefits provided after 30th June 2022 needs to be considered. Therefore, TDS at 10% will be deducted for Rs. 15,000 (after 30th June 2022)  

Example 2: An individual is provided benefits of Rs 22,000 up to June 30, 2022. In addition, benefits provided on or after July 1, 2022, up to March 31, 2023, are Rs 50,000.

The TDS under Section 194R shall be deducted from Rs 50,000. However, TDS on Rs 22,000 shall not deduct as the applicability of Section 194R is effective from July 1, 2022, onwards.

Example 3: An individual is provided the benefit of Rs 55,000 up to June 30, 2022. However, after this, no benefit is provided from July 1, 2022, up to March 31, 2023.

In this case, no TDS under Section 194R shall be deducted. It doesn’t matter if the benefits provided up to June 30, 2022,are more than the threshold of Rs 20,000.

Benefits Provided To Employees Of The Recipient Entity

The benefits or perquisites can be used by the owner, director or an employee of the recipient entity or their relatives who, in their individual capacity, may not be carrying on business or engaged in a profession.

TDS shall be deducted by the person in the name of the recipient entity. For example, a company may provide a free medicine sample to a doctor who is an employee of a hospital. The TDS under Section 194R is required to be deducted by the company in the hospital's hands.

Benefits Provided To Employees By The Employer

The employer (entity) shall treat this as a benefit or perquisite given to its employees under Section 17 and deduct tax under Section 192 of the ITA. 

The employer can seek credit of TDS  under Section 192 by furnishing its tax return. 

Benefits Provided To Consultant Of Company

The person providing the benefit or perquisite to a consultant of the entity may treat the entity as the beneficiary and deduct TDS under Section 194R. Then, such an entity can further deduct TDS under Section 194R for providing the same benefit or perquisite to the consultant. However, the person providing the benefit or perquisite at its option may also directly deduct the TDS of that consultant.