"Beware of Section 194R when giving away free benefits."
Introduction-
The Income Tax Act Incorporated Section 194R through the 2022 Union Budget. The era of claiming benefits in kind as an expense deduction without deduction of TDS is now over. Section 194R mandates the deduction of TDS on any such benefit before its release to the recipient. This measure aims to curb tax evasion and prevent the misrepresentation of income, contributing to enhanced tax compliance.
Section 194R of the Income Tax Act pertains to the taxation of benefits and perquisites received by individuals from businesses or professions. This provision is applicable to both monetary and non-monetary advantages. In line with the Budget-2022 update, any individual providing benefits or perquisites exceeding INR 20,000 to a resident is required to deduct 10% TDS.
The rationale behind of Section 194R-
The government implemented Section 194R of the Income Tax Act as a measure to counter tax evasion. Previously, numerous companies would provide gifts, perquisites, and other promotional benefits to their dealers, claiming deductions for these expenses from their business income.
Simultaneously, individuals benefiting from these perks often failed to report such in-kind income, contributing to tax evasion. In response, Section 194R was introduced, making it clear that any benefit, whether monetary or non-monetary, received by a resident individual from a business or profession is subject to taxation.
For E.g. ABC Ltd., a car manufacturing company, opting to provide cars as incentives to dealers who meet their annual targets. Previously, such benefits were categorized as business expenses, allowing the company to claim deductions. However, with the introduction of Section 194R, all benefits offered by businesses or professions, whether in cash or kind, are now subject to taxation. Consequently, Section 194R aids the government in monitoring income and curbing instances of tax evasion.
Applicability-
This provision becomes relevant when an individual receives gifts, perks, or incentives – whether in cash, kind, or a combination thereof – from an individual engaged in any business or profession. Additionally, the cumulative value of these benefits or perquisites must surpass INR 20,000.
According to Section 194R of the Income Tax Act, 1961, a TDS of 10% is mandated. Businesses or professions bear the responsibility of withholding TDS at a rate of 10% when the aggregate value of gifts or perquisites provided exceeds INR 20,000 per recipient in a given financial year.
Listed below are situations where Section 194R does not apply (Exclusions):
When the beneficiary of the benefit is a non-resident Indian, tax is deducted under Section 195.
In instances of an employer-employee relationship, Section 194R is not applicable. Benefits received by an employee from an employer are taxed under Section 192.
If there is no business relationship between the two parties involved in the transaction, a tax deduction does not apply.
This provision is not applicable to Individuals and HUFs with an annual sales or turnover of less than INR 1 crore for business and INR 50 lakhs for a profession.
TDS is not deducted if the total value of the benefit is less than INR 20,000.
CBDT Guidelines-
TDS is mandated to be deducted on amounts exceeding Rs. 20,000 under Section 194R in the following scenarios:
a) Furnishing complimentary event tickets.
b) Distributing free medicine samples to medical practitioners.
c) Sponsoring a trip for the recipient and their relatives upon achieving specific targets.
d) Providing incentives in the form of cash or kind, including cars, TVs, computers, gold coins, mobile phones, and so forth.
Valuation of Benefit/Perquisite Value:
a. If the provider acquires the benefit/perquisite before offering it to the recipient, the value for TDS deduction should be the purchase price.
b. If the provider is the manufacturer of the items in question, the value for TDS deduction is the price charged to its customers for such items.
c. In all other instances, the value for TDS deduction is the Fair Market Value of the benefit/perquisite.
(Note: GST will not be considered for valuation purposes for TDS.)
Examples -
1. The payer is not obligated to ascertain whether the benefit or perquisite is taxable in the hands of the recipient. Consequently, the deductor is mandated to withhold tax under Section 194R of the Act in all instances where a benefit or perquisite, regardless of its nature, is provided. This includes scenarios where the benefit has a capital nature, such as the provision of a car or land, as TDS is still applicable.
2. No Tax Deducted at Source (TDS) is applicable on sales discounts, cash discounts, and rebates provided to customers. This will not be considered as a benefit or perquisite.
E.g. Trendy Attire Emporium, a clothing shop, is currently running a special Diwali promotion offering a "buy 10 units, get 2 units free" deal on garments priced at Rs. 20,000 each. Consequently, the total selling price for 12 products amounts to Rs. 2,00,000. Given this promotional offer, the seller encounters difficulty in applying Tax Deducted at Source (TDS) on the benefit or perquisite, rendering TDS not applicable. However, it is noteworthy that in the case of free samples, TDS is applicable.
3. OnePlus Pvt. Ltd. On 19.04.2023, had given a cellphone (Valuing Rs. 22,000) to Tech-Influencer called Gaurav Chaudhary for advertising.
In this case, if product (Cellphone) is-
Retained by Gaurav Chaudhary even after marketing– TDS applicable u/s 194R.
Return to OnePlus Pvt. Ltd. After marketing the product- TDS not applicable as it’s not a benefit.
If mobile (Product) retained by Gaurav since the total benefit 22,000. TDS is required to be deducted. In this case TDS applicable & TDS to be deducted 22,000*10%= Rs. 2,200.
4. ABC & Associates, the auditor based in Mumbai, engaged in auditing for JJ Ltd. located in Goa, conducts an on-site audit at the client's premises. The client incurs travel expenses amounting to Rs. 54,000 on behalf of the auditor, which are not invoiced in the client's name but are paid by the client.
In this scenario, JJ Ltd. is obliged to deduct TDS under section 194R on the traveling expenses covered, with the TDS amounting to Rs. 54,000 * 10% = Rs. 5,400.
However, there would be no requirement to deduct TDS if:
The client did not bear this expenditure, or
The invoice was in the name of the client, and the expense was paid directly or reimbursed by the client.
Some implications related to the given example no. 4 are as follows:
1. If out-of-pocket expenses (reimbursement) are already included in the consideration, and TDS has been deducted under section 194C/194J on the total consideration, then TDS under section 194R is not applicable to the out-of-pocket expenses reimbursed by the client.
2. If any expenditure is undertaken by a Pure Agent on behalf of another person, and GST credit is also claimed by the other person, it is not considered a benefit or perquisite to the "Pure Agent."
5. If Torrent Pharma Ltd. furnishes complimentary samples valued at Rs. 60,000 to Dr. Singh, an employee of Apollo Hospital in Kerala, a benefit or perquisite is extended to the doctor due to his employment at the hospital. Consequently, Torrent Pharma is required to deduct TDS under Section 194R on the hospital's account. The hospital may subsequently categorize this benefit or perquisite as part of the employee's perquisite under Section 17 and deduct tax under Section 192 of the Act, resulting in its ultimate taxation in the hands of Dr. Singh.
However, in the scenario where Dr. Singh is a consultant for Apollo Hospital rather than an employee, Torrent Pharma will deduct TDS under Section 194R for the hospital, and the hospital will, in turn, deduct TDS under Section 194R for Dr. Singh. Alternatively, Torrent Pharma has the option to directly deduct TDS for Dr. Singh under Section 194R.
It is important to note that TDS under Section 194R does not apply if the benefit or perquisite is provided to a government entity, such as a Government Hospital, not engaged in business or a profession.
6. When a scheduled bank, cooperative bank, public financial institution, NBFC, or a public company involved in long-term loans, or an asset reconstruction company facilitates the waiver or settlement of a loan, it is not considered a benefit or perquisite for the purposes of Section 194R. As a result, there is no requirement to deduct TDS in such cases.
7. Embassies, High Commissions, Legations, Commissions, Consulates, and trade representations of foreign states are exempt from the obligation to deduct TDS under this section.
8. There is no requirement for TDS under Section 194R in the case of bonus shares distributed by any company to all shareholders or for right shares issued by a widely held company to all shareholders, as these transactions are not subject to the provisions of this section.
Thank You…!