Applicability of Section 194R of Income Tax Act, 1961:
-Any person responsible for providing to a resident
-any benefit or perquisite
-whether convertible into money or not
-arising from business or profession by such resident
-shall deduct TDS.
Explanation: Person responsible for providing means the person providing such benefit or perquisite, or in case of a company, the company itself including the principal officer thereof.
Applicable w.e.f.: 1st July, 2022.
Rate of TDS: 10% of the value or aggregate of value of such benefit or perquisite.
Comment: The benefit or perquisite which has been provided on or before 30th June 2022, would not be subject to tax deduction under Section 194R of the Act.
Threshold limit (from recipient’s perspective): The provisions of this Section shall not apply in case of a resident where the value or aggregate of value of the benefit or perquisite provided or likely to be provided to such resident during the F.Y. does not exceed ₹20,000.
Comment: The threshold limit of ₹20,000 shall be counted from 1st April, 2022 onwards.
Time of deduction: Before providing any benefit or perquisite.
Non-applicability (from deductor’s perspective): The provisions of this Section shall not apply to a person being an individual or HUF, whose total sales, gross receipts or turnover during the F.Y. immediately preceding the F.Y. in which such benefit or perquisite is provided by such person, does not exceed,
- in case of business: ₹1 crore
- in case of profession: ₹50 lakh
Applicability of Section 194R on Government entity as a recipient:
The provision of Section 194R of the Act shall not apply if the benefit or perquisite is being provided to a Government entity, like Government hospital, not carrying on business or profession.
Requirement of checking taxability under Section 28 (iv):
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 Section 28 (iv) of the Act or not. The amount could be taxable under any other Section as well.
There is no requirement to check whether the amount is taxable in the hands of the recipient or under which Section it is taxable.
Benefit or perquisite in cash or kind:
Where the benefit or perquisite, is
- wholly in kind or
- partly in cash and partly in kind
but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite, the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or perquisite.
Comments: This makes it clear that the benefit or perquisite can be in both forms i.e., cash or kind. There’s no mandate of it being in kind only.
Deduction and deposit of tax:
The requirement of law is that if a person is providing benefit in kind to a recipient and tax is required to be deducted under Section 194R of the Act, the person is required to ensure that tax required to be deducted has been paid by the recipient. Such recipient would pay tax in the form of advance tax. The tax deductor may rely on a declaration along with a copy of the advance tax payment challan provided by the recipient confirming that the tax required to be deducted on the benefit/perquisite has been deposited. This would be then required to be reported in TDS return along with challan number. This year Form 26Q has included provisions for reporting such transactions.
In the alternative, as an option to remove difficulty if any, the benefit provider may deduct the tax under Section 194R of the Act and pay to the Government. The tax should be deducted after taking into account the fact the tax paid by him as TDS is also a benefit under Section 194R of the Act. In the Form 26Q he will need to show it as tax deducted on benefit provided.
Perquisites under the head of Salary:
The benefits or perquisites referred to in Section 194R are not the perquisites u/s 17(2) of the Act as both are totally different and the latter falls under the head of salary income. Therefore, any benefits or perquisites given by an employer to its employees, like ESOP, Car, Rent Free Accommodations, Free Tours, etc., are not covered u/s 194R, as these are already subject to TDS u/s 192 of the Income Tax Act.
Benefit or perquisite in the form of capital asset:
The benefit or perquisite received by a recipient in the form of capital asset is also covered under the purview of this Section. The asset given as benefit or perquisite may be capital asset in general sense of the term like car, land etc., but in the hands of the recipient it is benefit or perquisite and is accordingly taxable. As mentioned earlier, the deductor is not required to check if the benefit or perquisite is taxable in the hands of recipient. Thus, the deductor is required to deduct tax under Section 194R of the Act in all cases where benefit or perquisite (of whatever nature) is provided.
Benefit or perquisite in the form of sales discount, cash discount and rebates:
Sales discounts, cash discounts or rebates allowed to customers from the listed retail price is in essence, lesser realization of the sale price itself. To that extent purchase price of customer is also reduced. Logically these are also benefits though related to sales/purchase. Since TDS under Section 194R of the Act is applicable on all forms of benefit/perquisite, tax is required to be deducted. However, it is seen that subjecting these to tax deduction would put seller to difficulty. To remove such difficulty, it is clarified that no tax is required to be deducted under Section 194R of the Act on sales discount, cash discount and rebates allowed to customers. Also, there might be cases where a few items are given free of cost with the original purchase, for instance, 2 kg sugar free on purchase of 8 kg sugar, in such cases also it is clarified that no tax is required to be deducted under Section 194R of the Act.
This relaxation shall not extend to other benefits provided by the seller in connection with its sale. To illustrate, the following are some of the examples of benefits/perquisites on which tax is required to be deducted under Section 194R of the Act (the list is not exhaustive):
- When a person gives incentives (other than discount, rebate) in the form of cash or kind such as car, TV, 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 free ticket for an event like IPL, etc.
- When a person gives medicine samples free to medical practitioners.
The above examples are only illustrative. The relaxation provided from non-deduction of tax for sales discount and rebate is only on those items and should not be extended to others.
Benefit or perquisite in the form of free samples:
Benefit or perquisite in the form of free samples is liable to TDS under this Section.
Benefit or perquisite used by owner/director/employee of the recipient entity or their relatives:
Benefits/perquisites may be used by owner/director/employee of the recipient entity or their relatives who in their individual capacity may not be carrying on business or exercising a profession. However, the tax is required to be deducted by the person in the name of recipient entity since the usage by owner/director/employee/relative is by virtue of their relation with the recipient entity and in substance the benefit/perquisite has been provided by the person to the recipient entity.
The threshold of ₹20,000 is also required to be seen with respect to the recipient entity and not individuals.
Illustration: Free medicine sample may be provided by a company to a doctor who is an employee of a hospital. The TDS under Section 194R of the Act is required to be deducted by the company in the hands of hospital as the benefit/perquisite is provided to the doctor on account of him being the employee of the hospital. Thus, in substance, the benefit/perquisite is provided to the hospital. The hospital may subsequently treat this benefit/perquisite as the perquisite given to its employees (if the person who used it is his employee) under Section 17 of the Act and deduct tax under Section 192 of the Act. In such a case it would be first taxable in the hands of the hospital and then allowed as deduction as salary expenditure. Thus, ultimately the amount would get taxed in the hands of the employee and not in the hands of the hospital. Hospital can get credit of tax deducted under Section 194R of the Act by furnishing its tax return.
Benefit or perquisite to doctors working as consultants in a hospital:
Tax is required to be deducted under Section 194R of the Act if the benefit or perquisite is provided to a doctor who is working as a consultant in the hospital. In this case the benefit or perquisite provider may deduct tax under Section 194R of the Act with hospital as recipient and then hospital may again deduct tax under Section 194R of the Act for providing the same benefit or perquisite to the consultant. To remove difficulty in such cases, as an alternative, the original benefit or perquisite provider may directly deduct tax under Section 194R of the Act from consultant (as a recipient).
Benefit or perquisite received by social media influencers:
Whether this is benefit or perquisite will depend upon the facts of the case. In case the benefit or perquisite is received in the form of a product like car, mobile, outfit, cosmetics etc., and if the product is returned to the manufacturing company after using for the purpose of rendering service, then it will not be treated as a benefit/perquisite for the purposes of Section 194R of the Act. However, if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under Section 194R of the Act.
Reimbursement of out-of-pocket expenses, whether benefit/perquisite or not:
Any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession.
For instance, a consultant is rendering service to a person Mr. A for which he is receiving consultancy fee. In the course of rendering that service, he has to travel to different city from the place where is regularly carrying on business or profession. For this purpose, he pays for boarding and lodging expense incurred exclusively for the purposes of rendering the service to Mr. A. Ordinarily, the expenditure incurred by the consultant is a part of his business expenditure which is deductible from the fee that he receives from Mr. A. Now if this travel expenditure is met by the Mr. A, it is a benefit/ perquisite provided by Mr. A to the consultant.
In case the invoice is obtained in the name of Mr. A and accordingly, if paid by the consultant, is reimbursed by Mr. A then in this case, the reimbursement made by Mr. A being the service recipient will not be considered as benefit/perquisite for the purposes of Section 194R of the Act.
If the invoice is not in the name of Mr. A and the payment is made by Mr. A directly or reimbursed, it is the benefit/perquisite provided by Mr. A to the consultant for which deduction is required to be made under Section 194R of the Act.
Dealer conference to educate the dealers about the products of the company, whether benefit/perquisite or not:
The expenditure pertaining to dealer/business conference would not be considered as benefit/perquisite for the purposes of Section 194R of the Act in case where dealer/business conference is held with the prime object to educate dealers/customers about any of the following or similar aspects:
(i) new product being launched
(ii) discussion as to how the product is better than others
(iii) obtaining orders from dealers/customers
(iv) teaching sales techniques to dealers/customers
(v) addressing queries of the dealers/customers
(vi) reconciliation of accounts with dealers/customers
However, such conference must not be in the nature of incentives/benefits to select dealers/customers who have achieved particular targets.
In case of dealer/business conference, the following expenditure would be considered as benefit or perquisite for the purposes of Section 194R of the Act:
(i) Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/business conference.
(ii) Expenditure incurred for family members accompanying the person attending dealer/business conference.
(iii) Expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such conference.
Valuation of benefit or perquisite:
- Benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient: Purchase price
- Benefit/perquisite provider manufactures such items given as benefit/perquisite: Selling price (charged to customers in normal course)
- In all other cases: Fair market value
GST shall not be included for the purposes of valuation of benefit/perquisite for TDS under Section 194R of the Act.
Due date of depositing TDS with the Govt.:
– for the months of April- February: 7th of next month.
– for the month of March: 30th April.
Due date of TDS return (form 26Q):
|
Quarter |
Period | Due Date |
| Q1 | April- June | 31st July |
| Q2 | July- September | 31st October |
| Q3 | October- December | 31st January |
| Q4 | January- March | 31st May |
Disclaimer: The author is based in Jabalpur and is a Practicing Company Secretary dealing in Corporate, Legal & Taxation services. The information contained in this write up, as provided by the author, is to provide a general guidance to the intended user. The information should not be used as a substitute for specific consultations. Author recommends that professional advice is sought before taking any action on specific issues.
The author can also be reached at cstanveersaluja@gmail.com.
Author Bio
Do we have to deduct TDS for Employees when we are giving sales incentive? and under which section we have to deduct