From 1st July, 2022, Section 194R will be applicable which states deduction of tax on benefit or perquisite in respect of business or profession i.e. TDS on benefit or perquisites given.
It is a general practice in many industries to gift cars, luxurious trips, laptops, mobile etc. as a gift for achieving targets or as an incentives etc specially in the Pharma industries. However, it is very uncertain that out of all such transactions, how much are reported by the recipient in his / her ITR as gift in excess of Rs. 50K from a non-relative is taxable u/s 56 of the Income Tax Act, 1961.
To curb this practice, Govt. brought Section 194R to deduct TDS on such benefit or perquisite.
Let us analyse the same as under:
| Applicability date | 1st July, 2022 |
| Nature of payer | Any person carrying business or profession. |
| Nature of Payee | Resident |
| Rate of Tax | 10% |
| Non Applicability | 1) If payee is Non Resident as Section 195 will be applicable.
2) In case payer being Individual / HUF whose total sales, receipts or t/o doesn’t exceed Rs. 1 Crore or in case of profession, doesn’t exceed Rs. 50 Lacs in the preceding financial year. 3) Aggregate value of such benefit or perquisite to a resident payee doesn’t exceed Rs. 20K in a year. For FY 22-23, it’s introduced from 1st July, 2022. However, the limit of Rs. 20K will be calculated from 1st April 2022 only but the provision of Section 194R shall apply on benefit / perquisite provided on or after 1st July, 2022. |
| Nature of benefit or perquisite | In cash or in kind or party in cash and partly in kind. |
| Valuation of benefit or perquisite given in kind | 1) The benefit / perquisite provider has purchased the benefit / perquisite before providing it to the recipient then purchase price will be the value of such benefit / perquisite.
2) The benefit / perquisite provider manufactures such item given as benefit / perquisite then the price that it charges to its customers for such items will be the value of such benefit / perquisite. 3) In any other case, fair market value of benefit or perquisite. |
| How to pay TDS in cash when benefit is party in kind or totally in kind. | Valuation of benefit / perquisite is explained above.
If benefit / perquisite is in cash only then there is no issue in payment of TDS as out of that cash, TDS will be paid and rest will be released to payee. Example: a benefit of Rs. 1 Lakh is to be given then 10% of Rs. 1 Lakh i.e. Rs. 10K will be deducted and paid as TDS and rest Rs. 90K will be paid to the payee. Now, suppose in case of benefit which is in party kind and in party in cash but cash component is not sufficient to meet TDS liability or the entire benefit / perquisite is in kind only then how to pay TDS. The solution is as under: 1) Recipient would pay tax in the form of advance tax and provide a declaration along with copy of the advance tax payment to the payer, or 2) The payer will deduct and pay TDS by himself to the Govt. instead of payee to pay advance tax etc. However, in this option it is to be noted that the TDS paid by the payer is again an additional benefit / perquisite to the payee and thus again liable to TDS u/s 194R only and thereby, the working of TDS should be done accordingly i.e. by grossing up. |
| What if that benefit / perquisite is not taxable in the hands of recipient | The payer is not required to verify the taxability in the hands of recipient.
Payer is required to deduct TDS on benefit / perquisite whether it falls as income or not for the recipient is not relevant for him. |
| Is 194R applicable if benefit / perquisite is in the nature of capital asset | Section 194R doesn’t distinguish between capital asset and non-capital asset.
It’s applicable on benefit / perquisite whether capital asset or non-capital asset is not relevant. |
| Sales discount / Cash discount / Rebates will attract 194R? | In general nature, it is also a benefit for the recipient and thus 194R is applicable.
However, it will create lots of difficulties if this is also brought to a tax bracket. Therefore, it has been clarified in the circular that no TDS u/s 194R is required to be deducted on sales discount / cash discount or rebates allowed to customers. However, gift of TV, computers, cars, sponsoring a trip etc. will not be covered in above and thus TDS u/s 194R will be applicable. |
| What if benefit / perquisite is provided to employee / director / other person of a recipient | TDS is to be deducted of recipient only and not of employee / director as employee / director are using it by virtue of their relation with the recipient entity only.
However, in turn the recipient may add the same as perquisite of that employee and may deduct TDS u/s 192 accordingly. |
| TDS applicable on delivering a product to social media influencers for marketing
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1) If product is returned back, then Section 194R will not be applicable.
2) If it is not returned back, then Section 194R will be applicable. |
| Reimbursement of out of pocket exp. | 1) If invoice is in the name of payer and paid by payee and taking reimbursement, then Section 194R will not be applicable as it’s a pure case of reimbursement.
2) If payee is taking invoice in his name but paid by the payer, then it will be treated as benefit / perquisite and thus Section 194R will be applicable. |
| Dealer conference to educate the dealers about the products of the company | TDS u/s 194 will not be applicable except for below:
1) Incentives / benefits given to dealers in that conference 2) Expenses attributable to leisure trip or leisure component even if it is incidental to conference. 3) Expenses incurred for family members of accompanying the person attending conference. 4) Expenditure on participants for days which are on account of prior stay or over stay beyond the dates of such conference. 5) Situations similar to above. |
| GST Applicability | Along with the provisions of Income Tax Act, 1961, GST provisions are also to be looked into.
Section 17(5) of the GST law states that credit to be reversed with respect to the goods given as gift or free samples. |
Source: Section 194R of the Income Tax Act, 1961 and Circular No.12 of 2022 dated 16th June, 2022.
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