Budget 2022- Stretches its TDS tentacles to widen tax base

“If Government were to be a farmer, then Tax deduction at source (TDS) provisions are its cash crops”.

TDS, as a concept, was introduced under Income-tax Act by the government to collect income at its very source itself rather than waiting for the taxpayers to pay tax. This enables ease of tax collection, tracking, and gathering of information during the year in which transaction is carried instead of waiting for the assessment to be conducted.

Time and again, TDS provisions have been used widening and deepening of tax base such that defaulters can be trailed as well as persuaded to file their tax returns

One more time, the Finance ministry brought a new category of payment within the net of tax deduction whereby provision of benefits or a perquisite exceeding Rs. 20,000 to a resident (arising from business by such resident recipient) during a financial year, is to be subjected to TDS at the rate of 10 percent. These provisions do not apply to certain individuals or HUF who are not subject to tax audit and this amendment will take effect from 1 July 2022.

Further, it is supplemented by a proviso to say that in case the benefit / perquisite is in kind, the payer to ensure that the tax has been paid in respect of such benefit / perquisite. In the event that benefit / perquisite is partly in cash and partly in kind, but cash part is insufficient to meet TDS liability, then too the payer is required to ensure the tax payment at the time of provision of such benefit / perquisite.

The charge for taxation of business perks is already created under section 28(iv) of the Act and is accordingly taxable as business income of the recipient. While there is no reference to section 28(iv) under the text of the proposed section 194R in the Finance Bill, the explanatory memorandum does intend to import the transactions falling within the scope of section 28(iv) of the Act.

The intention of the government seems to be bringing the benefits passed on by the businesses to their agents with the tax tentacles to plug revenue leakages in self-obedience.

At this juncture, let us understand each of the phrases used under the proposed framework of section 194R

Any person responsible for providing to a resident

A person providing such benefit or perquisite, or in case of a company, the company itself including the principal officer thereof

Any benefit or perquisite

The term ‘perquisite’ is defined under the context of salary income provides an inclusive definition which normally denotes meeting of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person. The ‘benefit’ is an advantage or useful effect that something has – The Oxford Dictionary. ‘Benefit’ used under section 28(iv) as well as section 194R is wider that the term ‘perquisite’.

The words ‘benefit’ or ‘perquisite’ used in section 28(iv) of the Act, have to be read together and would draw colour from each other. From the very beginning, the person providing such facilities or concessions knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or right of that person. Thus, the word “benefit” has also to be interpreted in the same manner i.e., at the time of execution of the business transaction, one party should give to the other party some irretrievable benefit or advantage – Helios Food Improvers P. Ltd v. Dy CIT (2007) (14 SOT 546) (TMum)

Whether convertible into money or not

It is not the actual receipt of money, but the receipt of a benefit or perquisite, which has a monetary value, whether such benefit or perquisite is convertible into money or not, which is what is covered by section 28(iv) of the Act – Commissioner of Income tax, Chennai vs Ramaniyam Homes (P) Ltd [2016] 68 taxmann. com 289 (Madras HC) as affirmed by SC

This would mean that benefit which is provided will be liable for TDS, irrespective of whether the benefit is capable of conversion into money form or not. Once the benefit itself is provided in the form of money – then provision is not attracted. In the context of section 28(iv) of the Act, the Supreme Court in the case of Mahindra & Mahindra Ltd (2018) 93 taxmann.com  (SC) has upheld that the benefit which is received has to be in some other form rather than in the shape of money. Importantly, the perquisite / benefit should not be a hypothetical and it must accrue in law to the recipient CIT vs Excel Industries 258 ITR 295 (SC)

The proviso to section 194R refers to provision of benefits which are either in ‘kind’ or ‘party cash and partly kind’. In such cases it is the obligation of the provider to ensure that the tax is paid.

On a conjoint reading with section 194R, the explanatory memorandum to Finance Bill 2022, section 28(iv) of the Act along with its available jurisprudence, it makes it clear that the proposed TDS provisions to be applied in relations to only to non-cash perquisites having a monetary value.

Arising from business or the exercise of a profession, by such resident

The fringe benefits availed in addition to contractual considerations earned in carrying out business or profession is taxed as business income under the head ‘Profits and gains from business and profession’ under section 28(iv) of the Act. The solitary objective of section 28(iv) is to tax benefit obtained as quid-pro-quo for the services rendered.  

For the purposes of applying proposed section 194R too, the benefits / perquisite provided by the provider should be arising from the business or profession by the person receiving it. Thus, it is of paramount importance that the receiver gets a right to receive the fringe benefits as an obligation on the part of the provider, and the benefit  so provided should have a direct nexus with the business carried on or services provided by the recipient of such benefits.  Where, the taxpayer receives a benefit without carrying out any business activity, it would not be taxable under this section.

Notably, section 28(1) of the Act creates a charge on profits and gains from business or profession, whereas section 28(iv) of the Act creates charge on perquisite / benefits received in kind (whether it can be converted into money or not).  Capital receipts are not taxable under section 28(iv) of the Act.

Now, let us understand the applicability of the proposed withholding tax provisions with the help of certain examples:

An another interesting question arises as to once the perquisite / benefit is received, how to value such perks for the purposes of TDS compliance. It is highlighted that the proposed section 194R does not provide a method of valuation of such benefit or perquisite. However, Rule 3(4) of the Income-tax Rules, 1962 dealing valuation of salary perquisite provides that cost to the employer should be considered as a value of the perquisite. However, if there is a time gap in incurrence of expenditure and provision of benefit, there might be issue of valuation. Similarly, if the acquirer of the benefit and his cost is different than the provider of the benefit, then market value of such benefit or perquisite could be considered. Thus the provider of the ex-gratia perks not only plunges into characterisation of receipts in the hands of the recipient but also its value determination.

The cornerstone of the proposed amendment is to ensure that tax on the benefits / perquisite which has a direct nexus with the business of the recipient are collected at the source itself for not only blocking revenue leakages but also garner the revenues exchequer and encourage compliance. Conversely, it may result into an un-intended consequences such as disallowance of TDS on sales promotion schemes, dispute as to whether the benefits are contractual or ex-gratia, valuation etc which would affect the working capital inflow of the businesses. The Memorandum provides that this amendment will take effect from 1 July 2022. Accordingly, businesses have time up to June 2022 to scrutinise their promotional spends, incentive/ referral schemes  and review contractual arrangement to assess the impact of the proposed provisions.

The Central Board for Direct Taxes (CBDT) may consider to issue Frequent Asked Questions (FAQ) and clarify that the cash benefits are out of the scope of the proposed section 194R and provide a guidance on the basis on how benefit / perquisite in kind may be valued (for eg. based on the procurement cost, manufacturing cost etc). From the tax payers’ standpoint, it will be necessary to review the contractual terms, promotional/ discount schemes, its approval mechanism, nexus with the business of the recipient and the cost of benefits provided to various stakeholders.

Authors: Mansi Mehta-Senior Manager, Latha Sherlekar- Tax Senior from Deloitte Haskins & Sells LLP