Introduction of 194R
The Central Board of Direct Taxes of the Income Tax Department has issued new guidelines for applying a new TDS provision relating to receiving benefits in a business or profession. Finance Act 2022 added a new section 194R to the Income-tax Act of 1961, which was notified earlier this year during Finance Minister Nirmala Sitharaman’s Budget speech.
The Finance Bill 2022 proposes two entirely new TDS sections in the Income Tax Act, 194R and 194S, to take effect on 1.7.2022.
Intention Behind 194R
TDS was implemented under Section 194R after the department discovered that many companies claimed expenses for business promotions by providing various gifts/perks/benefits to their dealers under Section 37 of the Income Tax Act of 1961. Nonetheless, most dealers failed to report the aforementioned gifts/perks/benefits as business income, as required by Section 28 (iv) of the Income Tax Act of 1961. The section was designed to track such income and bring gifts/perks/benefits received through business connections by resident dealers.
Benefits/Perks under 194R
Because the terms ‘benefits’ and ‘perquisites’ have not been defined separately for the purposes of Section 194R, clarity on their coverage and scope is required. Section 194R perks and benefits are those rewards, advantages, facilities, or amenities that a resident receives in lieu of the regular monetary consideration payable to him in the course of his business or profession, most likely in-kind or a combination of cash and kind. According to Section 28(iv) of the Income Tax Act, such benefits or perquisites are taxable as business receipts.
- Expenses for a leisure trip or leisure component, even if they are incidental to the dealer/business conference.
- Expenses incurred for family members accompanying the dealer/attendee to the business conference.
- Expenses incurred by participants in a dealer/business conference for days spent before or following the conference dates.
How a Person Becomes Eligible:
Section 194R applies to all assesses except individuals and HUFs in the assessment year 2022-23. It applies to individuals and HUFs with a turnover of more than Rs. 1,00,00,000 or a professional receipt of more than Rs 50,00,000.
Transactions Which Attract 194R
This section 194R requires any person who provides any benefit or prerequisite to a resident over Rs. 20,000 in value in a year, and such benefit or perquisite is like income falling under section 28(iv) of the Income Tax Act, to deduct 10% tax at source.
Applicability of 194R
- The person responsible for providing a resident with any benefit or perk has to deduct the tax. There is no additional requirement to determine whether the amount is taxable in the recipient’s hands or under what section it is taxable.
- The benefit or perquisite does not have to be in kind for section 194R to apply. Section 194R applies even if the benefit or perquisite is paid entirely in cash.
- Capital assets like cars, buildings, or similar things are also covered in section 194R if given as benefits and perquisites.
Non-Applicability of 194R
- The benefit or perquisite provided on or before 30 June 2022 would be exempt from taxation under section 194R of the Act.
- Gifts given on special occasions such as festivals, birthdays, weddings, and so on may not be deductible at the source because section 194R only considers benefits or perquisites arising from a business or profession.
- Except for hospitals, CBDT gave customers a reprieve by exempting sales discounts, cash discounts, and rebates from Section 194R because their inclusion would cause problems for the seller.
- The benefits or privileges mentioned in section 194R do not apply to the benefits and privileges mentioned in section 17(2) under the salary heading. Section 192 already exists to provide such benefits and perks.
- Section 194R does not apply if the benefit or perquisite is provided to a Government entity not engaged in business or profession.
An Example of 194R
Now that Mr. Jay has enjoyed the benefits of such expensive gifts, but has not registered it has his income, Section 194R will be applied and 10% of TDS will be levied. The amount results in Rs. 1,00,000 (25,000+10,000+65,000) which is over the prescribed limit of Rs. 20,000. Rs 10,000 TDS should be deducted by Mr. Raj.
The TDS implications will turn out to be something like this:
- Deduction: Well before transferring funds to the recipient
- Due date of Payment: 7th of every month
- TDS Returns: Quarterly (Date: 31st)
Frequently Asked Questions (FAQs)
- How is the benefit/perquisite valuation to be carried out?
Except in the following cases, the valuation would be based on the fair market value of the benefit or perquisite:
(I) the benefit/perquisite provider purchased the benefit/perquisite before providing it to the recipient. The purchase price, in that case, shall be the value for such benefit/perquisite.
(ii) If the benefit/perquisite provider manufactures the benefit/perquisite items, the price charged to its customers shall be the value for such benefit/perquisite. It is also stated that GST will not be included in the valuation of benefit/perquisite for TDS purposes under Section 194R of the Act.
Note: GST will not be included in the valuation of benefit/perquisite.
2. Is reimbursement of out-of-pocket expenses incurred by the service provider while providing the service a benefit or a requirement?
Any expenditure incurred by a person engaged in business or profession that another person meets is effectively a benefit/perquisite provided by the second person to the first person in the course of business/profession.
3. A social media influencer is frequently given a product by a manufacturing company so that he can use it and record audio/video to promote it on social media. Is the product given to such an influencer a benefit or a perk?
If a benefit or perquisite is a product such as a car, mobile phone, outfit, cosmetics, etc., and the product is returned to the manufacturing company after being used for rendering service, it will not be considered a benefit/perquisite for section 1948 of the Act.