Vide Budget 2022, the Government has introduced Section 194R in the Income Tax Act,1961 (ITA) obligating the deduction of tax on ‘benefits/perquisites whether convertible into money or not, arising from business or of a profession’ if the aggregate value of benefit/perquisite exceeds twenty thousand rupees in a financial year at the rate of ten per cent. The benefits or perquisites are taxable under the head business or profession under section 28(iv) of the ITA.
As per the memorandum explaining the provisions of the Finance Bill 2022, the rationale behind the introduction of this section is to trace the benefits/perquisites arising due to business or a profession which mis reporting in the return by the taxpayers. However, the benefits/perquisites extended by the employer to the employee are not governed by this section and are covered under section 17 of the ITA. Only those benefits are included in Section 28(iv) which arise as a result of business or profession of the recipient. Further, the assesses with aggregate turnover upto one crore rupees or fifty lakhs in case of profession in the preceding financial year are not required to deduct tax at source.
The Government vide circular no 12/2022 dated 16th June, 2022 issued guidelines on the applicability of this section. As per the guidelines issued in that circular the deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under clause (iv) of section 28 of the ITA.
Further, as per the guidelines given in the circular, the cash discount/sales discount or rebate provided by the supplier to the recipient are not covered under benefits or perquisites hence, the deductor is not liable to deduct tax on these, thus easing the compliances for the suppliers. However, free sample distributed by supplier to their agents/dealers/channel partners would be termed as benefits/perquisites and hence, the tax is liable to be deducted.
The intent of the legislature is to cover all the benefits/perquisites arising as a result of business relations between the parties whether such benefits/perquisites are in cash or in kind or partially in cash or partly in kind. For the purpose of valuation if the benefit is in kind, the fair market value of the benefit/perquisite would be considered for deduction of tax except in the following cases:
GST shall not be included for the purpose of valuation of benefit/perquisite for deduction of TDS. Also, the provisions of section 194R of ITA shall not apply if the benefit/perquisite is being provided to a Government entity which is not carrying on any business or profession.
It is pertinent to note that for the purpose of determining the threshold of twenty thousand the benefits/perquisites provided on or after 1st April, 2022 shall also be counted for triggering the threshold limit and if the amount of such benefits or perquisites exceeds twenty thousand before 1st July,2022 i.e, the date on which this section has come into effect, then tax is liable to be deducted on the benefits/perquisites provided subsequently. The benefits or perquisites which have been provided on or before 30th June,2022 would not be subjected to tax deducted at source under section 194R of ITA.
Further, it has been clarified that the benefits/perquisites may be used by the owner/director/employee of the recipient entity who in their individual capacity may not be carrying on any business or exercising a profession. In this case also, the supplier/entity is required to deduct tax of the recipient as the relationship of the supplier/entity is with the recipient and it is immaterial who is enjoying the end benefit of these benefits/perquisites provided by the supplier/entity.
From the above it can be inferred that the Government is widening the scope of tax deduction at source and has left no stone unturned to trace the benefits/perquisites which are not reported by the recipients in their income tax returns. However, deduction of tax without knowing the taxability of the same in the hands of the recipient may lead to litigation in near future. This issue needs further clarification by the Government.