SECTION 194R: DEDUCTION OF TAX ON BENEFIT OR PERQUISITE IN RESPECT OF BUSINESS OR PROFESSION
In Union Budget 2022, a new TDS section 194R has been inserted in the Income Tax Act.
Effective from: July 1st 2022.
ALLPLICBILITY– Any person who is providing any benefit or perquisite, exceeding Rs. 20,000 in value, to a resident in relation to such resident’s business or profession and such benefit or perquisite can be either in cash or kind or combination of both.
TDS rate: 10%
BENEFIT PROVIDER/ DEDUCTOR– Any person
BENEFIT SEEKER/DEDUCTEE– A resident person.
TURNOVER LIMIT for Deductor–
In case of an individual or HUF
Where the person responsible to deduct tax i.e., benefit provider is an individual or a HUF, whose total sales, gross receipt or turnover exceed Rs. 1Crore in case of business and Rs. 50Lakhs in case of a profession, during the financial year immediately preceding the financial year in which such benefit is provided, is required to deduct any TDS.
In any other case: No Limit
Now there were various queries in confusion in this section and hence to clarify the issues CBDT has issued a circular No. 12 of 2022 Dt. 16.06.2022 and some major takeaways from such circular are as under:
It is not mandatory that the recipient of perquisite or benefit shows the amount as business income
1. It is not necessary for the payer/deductor to check the taxability of the sum in the hands of the payee under Section 28(iv) and highlights that the sum could be taxable under any other section like Section 41(1). CBDT clearly distinguishes the principles governing TDS under Section 195 from the TDS under Section 194R and places reliance on SC ruling in PILCOM vs. CIT West Bengal (Civil Appeal No. 5749 of 2012), where it was held that where TDS at a specific rate is provided for, there is no need to see the taxability or the rate of taxability in the hands of the non-resident.
Capital Assets also covered as perquisite
2. The nature of asset given as benefit or perquisite is not relevant and even capital assets given as benefit or perquisite are covered within the scope of Section 194R. CBDT categorically uses the phrase ‘of whatever nature’ on benefit or perquisite for fastening TDS liability on the payer.
Sales Discount, Cash Discount & Rebates not covered as perquisite
3. CBDT provides a breather on sales discount, cash discount and rebates allowed to customer by excluding them from the purview of Section 194R as their inclusion would put the seller into difficulties. CBDT does state that these are benefit or perquisite though related to sale/purchase.
Incentives given to customer other than Sales Discount, Cash Discount & Rebates are covered for applicability of such TDS
4. Section 194R shall apply to seller giving incentives, other than discount or rebate, which are in cash or kind e.g., car, TV, computers, gold coin, mobile phone, sponsored trip, free ticket, medicine samples to medical practitioners. It is noteworthy that the list provided by the CBDT is not an exhaustive but only illustrative.
Who is the ultimate user of Benefits or Perquisites is Not Relevant
5. Section 194R shall cover benefits or perquisites even where that may be used by owner/director/employee of the recipient entity or their relatives who in their individual capacity may not be carrying on business or exercising a profession. TDS needs to be deducted of the entity with whom the benefit provider has relation irrespective of who is the ultimate user.
For Hospitals & Doctors Receiving Samples
6. CBDT clarifies that in case of doctors receiving free samples of medicines while employed in a hospital, Section 194R would apply on distribution of free samples to the hospital. The hospital as an employer may treat such samples as taxable perquisite for employees and deduct tax under Section 192. In such cases, the threshold of Rs.20,000/- has to be seen with respect to the hospital.
For doctors working as consultants with a hospital and receiving free samples, TDS would ideally apply on hospital first which in turn would require to deduct tax under Section 194R with regard to consultant doctors. To remove this difficulty, CBDT clarifies that as an alternative, the original benefit or perquisite provider may directly deduct tax under Section 194R with regard to the consultant doctor as a recipient.
Section 194R shall not apply if the benefit or perquisite is provided to a Government entity, like Government hospital, not carrying on business or profession.
How to value the perquisite provided if it is not in cash?
7. The general rule is that valuation of benefit or perquisite shall be based on the fair market value with following exceptions:
Provider purchased it before providing it – purchase price
Provider manufactured it – price charged to customers
(Value shall be exclusive of GST)
Perquisite where product is given to Social Media Influencers for reviewing or making video of the product:
8. Benefit or perquisite being a product given to the social media influencer which is returned to the provider after using it for the purpose of services provided by the influencer shall not be subject to TDS. Thus, the products retained by the influencer shall be subjected to TDS
Reimbursement of Out-of-Pocket Expenses to service provider incurred while providing service:
9. Ordinarily, the expenditure incurred by a consultant is his business expenditure deductible against his income received from the client. Where the consultant incurs travel expenditure which is paid by the client, it is a benefit or perquisite provided the client to the consultant.
If the invoice is not in the name of recipient of service and the payment is made by recipient of service directly or reimbursed, it is the benefit/perquisite provided by recipient of service to the consultant for which deduction is required to be made under section 194R of the Act.
If invoice is in the name of the client, paid by the consultant and reimbursed by the client then such reimbursement would not attract TDS.
TDS applicability on Dealers or Business Conference
10. The expenditure incurred on Dealers’ Conference would not be subject to TDS if held with the prime object to educate dealers/customers about any of the following or similar aspects:
(i) new product being launched
(ii) discussion as to how the product is better than others
(iii) obtaining orders from dealers/customers
(iv) teaching sales techniques to dealers/customers
(v) addressing queries of the dealers/customers
(vi) reconciliation of accounts with dealers/customers
Exception to this rule is that such Conference must not be in the nature of incentives/ benefits to select dealers/ customers who have achieved particular targets.
Also, TDS shall apply if expenditure is:
(i) attributable to leisure trip or leisure component, even if it is incidental to the dealer/business conference.
(ii) incurred for family members accompanying the person attending dealer/business conference
(iii) on participants of dealer/business conferences for days which are on account of prior stay or overstay beyond the dates of such conference.
Section 194R provides that if the benefit/perquisite is in kind or partly in kind (and cash is not sufficient to meet TDS) then the person responsible for providing such benefit or perquisite is required to ensure that tax required to be deducted has been paid in respect of the benefit or perquisite, before releasing the benefit or perquisite. How can such person be satisfied that tax has been deposited?
11. The requirement of law is that if a person is providing benefit in kind to a recipient and tax is required to be deducted under section 194R of the Act, the person is required to ensure that tax required to be deducted has been paid by the recipient. Such recipient would pay tax in the form of advance tax. The tax deductor may rely on a declaration along with a copy of the advance tax payment challan provided by the recipient confirming that the tax required to be deducted on the benefit/perquisite has been deposited.
This would be then required to be reported in TDS return along with challan number. This year Form 26Q has included provisions for reporting such transactions.
In the alternative, as an option to remove difficulty if any, the benefit provider may deduct the tax under section 194R of the Act and pay to the Government. The tax should be deducted after taking into account the fact the tax paid by him as TDS is also a benefit under section 194R of the Act. In the Form 26Q he will need to show it as tax deducted on benefit provided.
How to calculate the threshold of Rs. 20,000 u/s 194R for FY 2022-23 as the law will be applicable from 01.07.2022?
12. Section 194R comes into effect on Jul 1, 2022. Thus, CBDT clarifies on how this limit of twenty thousand is to be computed for FY 2022-23.
Calculation of value or aggregate of value of the benefit or perquisite triggering TDS shall be counted from Apr 1, 2022.
If the value of the benefit or perquisite provided or likely to be provided to a resident exceeds Rs.20,000/- during FY 2022-23 (including the first 3 months), TDS would apply on any benefit or perquisite provided on or after Jul 1, 2022.
CBDT clarifies that benefit or perquisite provided on or before Jun 30, 2022, shall not be subjected to TDS under Section 194R and only be considered to calculate the limit of Rs. 20,000.
To read full circular CLICK HERE: circular-no-12-2022.pdf (incometaxindia.gov.in)
Key Takeaways from clarification issued by CBDT in relation to section 194R are as under:
- CBDT has done away with the requirement that the recipient should be showing such recipient as business income for deduction of TDS which was a mandatory requirement of the section. This has increased the tax net of the section and thus this become applicable on normal customers as well.
- As a result of including customers in such TDS it will be interesting to see how to show and claim credit of such gift if the value of such gift is between 20,000 to 50,000. As gift above Rs. 50,000 is anyways taxable under section 56.
- Further CBDT has also mentioned that it will cover both type of transaction i.e. it does not matter whether perquisite is received in cash or kind, however as per the memorandum and finance Act it can be seen that the intention of law was to cover cases where benefit was paid in other than cash mode.
- CBDT has also covered gift provided to doctors under this section although giving gift or benefits to doctors is not allowed and is a disallowed expenses u/s 37 of the Income tax Act as the medical association of India does not allow doctors to accept such gift.
- Considering out of pocket expense while providing service as perquisite will create a lot of difficulty for Chartered Accountants who conduct Audit and have to regularly incur out of pocket expense.
- This section has also tried to bring the social media influencers specifically which shows that department is trying to keep track of the changing trend.
Thus, it is interesting to see that this circular of CBDT is over-ruling the actual provision of law at many places rather than just issuing clarification.
Guidance on above article by:
CA Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with a renowned firm in Jaipur having experience in dealing Assessments, Tax Audit, International Taxation, Tax planning for NRI, Business planning and consultation.
E-mail: naman.maloo@jainshrimal.in | LinkedIn: Naman Maloo
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