Section 194R Introduction
Many companies often transfer benefits arising out of sales or services directly to their agents. It is a common practice for many corporates to gift cars, trips, laptops, mobiles etc. to their stakeholders for achieving targets or as incentives. These people may be selling agents, sales personnel, contractors, marketing companies, etc. These gifts over INR 50,000 per year are taxable under section 56 of the Income Tax Act, 1961. However, these transactions are often skipped or not reported in the income tax return. As there is no source of information for the income tax department, such income escapes from the clutches of the income tax department. Often businesses use this loophole to circumvent the law and the taxes to be paid, providing a tax-free incentive to the party involved. Therefore, to plug this loophole, the Government has brought a new section 194R. From July 1, 2022, section 194R has become effective whereby tax needs to be deducted at source (TDS) on benefits or perquisites given by a business entity.
What are the legal provisions under section 194R?
Section 194R has been inserted to provide that any person responsible for providing, any benefit or perquisite, arising from business or profession, should ensure that tax has been deducted in respect of such benefit or perquisite.
Applicability – This new section will be effective from July 1 onwards.
Nature of benefit – The benefit or perquisite can be in any form. It can be in cash, in-kind, or partly in cash and kind. The tax has to be deducted, whether or not, the same is convertible into money.
Valuation of benefit – If the payer of benefit has purchased the benefit/perquisite before providing it to the recipient then the purchase price of such benefit or perquisite shall be considered as the value of benefit/perquisite under section 194R. If such benefit/perquisite is manufactured by the company then the price that it charges to its customers for such items will be considered as the value of such benefit/perquisite. In other cases, the fair market value of the benefit or perquisite shall be considered for reporting under section 194R.
Type of payers – The provisions apply to all persons involved in business or profession. The provisions shall not be applicable in the case of individuals or HUF with turnovers less than 1 Crore in case of business and 50 lakh in case of the profession.
Type of payee – Such other person must be a resident Indian. If such person is a Non-resident then the provisions of section 195 shall apply.
Rate of tax – The rate of such tax deduction shall be 10% of the value of such benefit or perquisite.
Monetary threshold – Such deduction will not be required if the value of benefits does not exceed INR 20,000 during any financial year. However, for the financial year 2022-23, this threshold shall be considered from April 1, 2022, onwards, while the deduction shall be applicable on benefit value exceeding the limit, and given after the effective date.
How to deduct tax under section 194R?
If the benefit is provided in cash, the procedure is similar to tax deduction under any other section. The person responsible for tax deduction has to retain 10% of the total benefit to be given and pay the rest amount while making the payment. However, when the benefit is provided in kind, there are difficulties that a person must be aware of. The recipient in such cases is expected to pay the tax in the form of advance tax and provide a declaration along with a copy of the advance tax payment to the payer. Alternatively, the payer can deduct and pay TDS out of his pocket or collect it from the receiver in cash. A similar process needs to be followed when the benefit is provided partly in cash and partly in kind. Where the cash component is sufficient to cover the 10% TDS, the same may be retained by the payer and the balance can be paid out. However, where cash payment is not sufficient to cover the TDS amount, any of the above-mentioned two options can be followed.
It is important to note that the TDS when paid by the benefits payer out of their pockets, the same also becomes a perquisite and therefore, tax needs to be paid on the amount of TDS as well, on an inclusive basis i.e. by grossing up the total amount. For example, if the value of the benefit is INR 1,00,000 and TDS is being borne by the payer then the TDS needs to be calculated as follows: INR 1,00,000 divided by 90% which equals INR 1,11,111 being the value perquisite to be reported. The TDS thereon would be INR 1,11,111 multiplied by 10% which equals INR 11,111.
Section 194R in Special Scenarios
- Section 194R doesn’t distinguish between capital assets and non-capital assets. Therefore, it is applicable on benefit/perquisite irrespective of the same being capital or non-capital asset.
- Sales discount/Cash discount/Rebates are also by nature, a benefit provided to the recipient and satisfies the conditions of section 194R. This has been clarified through a circular that TDS under section 194R will not be required to be deducted on the aforementioned benefits like the discount. However, if the same is provided in-kind or by way of gift, TDS under section 194R will be applicable.
- The recipient in the case of section 194R does not include the employee/director, as the benefits or perquisites provided to them are already covered under section 192 and TDS has to be deducted according to the provisions of that section.
- In the case of social media influencers who receive products for marketing, TDS under section 194R would be required to be deducted, if the product is not returned to the company. Thus, social media influencers who often received free products for marketing will now have to pay tax on such products, as TDS will be deducted and reported to income tax.
- In case of reimbursement of expenses, section 194R will not be applicable if the same is a pure reimbursement i.e. the expenses incurred are billed at par and the invoices are in the name of the reimburser. If these conditions are not satisfied, TDS under section 194R will be required to be deducted.
Section 194R has widespread effect in many areas of taxation. Therefore, experts and accountants will now have to keep a special eye on the provisions of this section while evaluating any transaction from a tax perspective.