The Central Board of Direct Taxes (CBDT) has issued guidelines for the applicability of Section 194R for tax deduction at source on benefits or perquisites received in a business.
Budget 2022-23 introduced a new section in the IT Act -194R. It requires the deduction of tax at source at 10% by any person who provides any benefit or perquisite exceeding Rs 20,000 in a year to a resident arising from the business or profession of such resident.
So, let’s delve into the guidelines issued by the income tax department.
Benefits or perquisites on which tax is required to be deducted
The guidelines have cited below examples where the tax is required to be deducted under Section 194R:
- When a person gives incentives in cash or kind such as TV, car, computers, gold coin, mobile phone, etc.
- When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets
- When a person provides a free ticket for an event
- When a person gives medicine samples free to medical practitioners
However, the above list is not exhaustive.
If the recipient is not liable to pay tax on the benefits
The guidelines state that it is not required to check whether the amount is taxable or not in the hands of the recipient. The TDS provision u/s 194R shall apply even if the recipient of the benefits or perquisites does not report such receipt of benefits in their income tax return. Also, in case the benefits are taxable, it is not necessary to check the section under which it is taxable in the hands of the recipient.
Does it apply to benefits received in cash or kind?
The government also clarified that the benefits or perquisites on which TDS (Section 194R) needs to be deducted do not need to be only in kind. The scope of the said provision includes situations where the benefit or perquisite is received in kind, in cash, or partly in kind and partly in cash.
It has also provided that TDS under Section 194R will apply irrespective of the nature of the benefits and perquisites provided. It has explained the same highlighting various court judgements where the benefits or perquisites like car, land, etc. (capital assets) are held to be taxable in the hands of the recipient.
Valuation of the benefit/perquisite
The fair market value (FMV) of the benefit or perquisite provided to the recipient shall be used for valuation purposes. However, if the benefit or perquisite is purchased before providing it to the recipient, it will be valued based on its purchase price. If the benefit or perquisite is manufactured, it must be valued based on the price charged to the customers.
Calculation of the threshold limit
Section 194R will be triggered if the value of the benefit or the perquisite exceeds Rs 20,000 during the year (including the period 1st April 2022 to 30th June 2022). The benefits provider should deduct TDS under the said section only on the benefits or perquisites provided after 1st July 2022.
How to deduct tax on benefits in kind?
If the benefit or perquisite is to be provided in kind, the deductor has to ensure that the recipient of such benefit pays advance tax on the value of such benefit.
Alternatively, the benefits provider may pay TDS to the government under Section 194R (TDS to be also considered as part of the benefit).
Other circumstances explained
Certain other cases are explained to understand the applicability of TDS
- A product of a manufacturing company given to the social media influencer to promote it on social media shall be considered as a benefit or perquisite if the product is not returned.
- Any expenses incurred by a person in a business or a profession, if paid by the customer/service recipient, is in effect a benefit/perquisite provided by the customer/service recipient to the first person in the course of business/profession. However, if the business/service provider pays for the expenses and the same is reimbursed by the customer/service recipient, then it is not a benefit or perquisite, provided the invoice is obtained in the name of the customer/service recipient.
Exceptions to Section 194R
The guidelines have illustrated various situations of sales promotion where TDS under Section 194R would not be applicable.
- Sales discounts, cash discounts, and rebates allowed to customers
- Where some units of a product are rewarded on purchase of specific units of the same product (example, BOGO-buy one get one) for a charge or substantial discount
However, the above exception of non-deduction of tax is not applicable in a situation of free samples.
It has further stated that Section 194R shall not apply if the benefit or perquisite is provided to the government entity not carrying on any business or profession, for example, government hospital, etc.
Also, expenses incurred for the conferences to educate the dealer/business about the product launch, sales techniques, or similar aspects shall not be considered a benefit or perquisite. However, such conferences must not be like incentives or benefits to the select dealer/customers achieving particular targets.
Hence, from now onwards, the taxpayers need to identify transactions which are in the nature of benefits and perquisites and comply with the new TDS provision.
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