Section 194R – Double Taxation/Entry of FBT from back door?

Applicability of Section 194R of Income tax Act 1961, is it Double Taxation / Entry of Fringe Benefit Tax (FBT) from the back door / Collection of Additional Revenue or is it the ‘Ease of doing business?

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 the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite:

Provided that in a case where the benefit or perquisite, as the case may be, 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:

Provided further that 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 financial year does not exceed twenty thousand rupees:

Provided also that the provisions of this section shall not apply to a person being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided by such person.

Guidelines for Deduction of Taxes under Section 194R

1. There is no further requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable.

2. There is no requirement that the benefit or perquisite in cash or in kind

3. Benefits or perquisites are taxable even capital asset like cars, land, etc. given as benefit or perquisite.

4. No tax is required to be deducted under section 194R on sales discounts, cash discounts, and rebates to customers.

5. The provision of section 194R shall not apply if the benefit or perquisite is being provided to a Government entity that is not carrying on business or profession.

6. The board has clarified that the valuation of benefit/perquisite shall be based on fair market value of the benefit or perquisite. However, if deductor has purchased the benefit/perquisite before providing it to the recipient. In that case, the purchase price shall be the value for such benefit/perquisite. If the deductor manufactures such items then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.

7. The CBDT has clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R.

8. The board has said the expenses incurred by service provider while rendering service is part of his business expenditure and deductible while computing total income. Thus if any expenses incurred by service provider are met by service recipient then the same shall be treated as benefit. However, if the invoice has been obtained in name of service recipient and then the reimbursement made to service recipient will not be considered as benefit/perquisite for the purposes of section 194R.

9. CBDT Clarifies on Agent/Dealer meet

The following expenditure to dealer/business conference would be considered as benefit

1. 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.

10. The provisions of section 194R are applicable with effect from 01-07-2022. The Board has clarified that threshold limit of Rs. 20,000 for TDS under section 194R shall be counted from 01-04-2022.

Certain other cases to understand applicability of TDS under Section 194R

1. A product of a manufacturing company given to the social media influencer to promote it on social media shall be considered as a benefit or perquisite if the product is not returned.

2. Any expenses incurred by a person in a business or a profession, if paid by the customer/service recipient, is in effect a benefit/perquisite provided by the customer/service recipient to the first person in the course of business/profession. However, if the business/service provider pays for the expenses and the same is reimbursed by the customer/service recipient, then it is not a benefit or perquisite, provided the invoice is obtained in the name of the customer/service recipient.

Whether TDS under Section 194R is double Taxation?

When one commercial entity Purchase any from any one for example ABC Enterprise purchased 12 Pcs Cell Phone from XYZ Company Ltd and those cell phones to provide gift to his Agent/Dealers, here in black and white we can say that Income generated by XYZ Company Ltd and Expenses of ABC Enterprise, after giving such cell phone as gift to Agents and Dealers such Cellphone cost will be the Income of such Agents and dealers, here Govt generate revenue twice from the one part of the Selling Company and other from the beneficiary of the Cell Phone.

Article 265 in the Constitution of India 1949, Taxes not to be imposed save by authority of law No tax shall be levied or collected except by authority of law, here the clear violation of Article 265?

Whether TDS under Section 194R is Fringe Benefit Tax 2005?

Fringe Benefit Tax (FBT) was introduced as part of Finance Act, 2005 as an additional income-tax and came into force from April 1, 2005. The term Fringe Benefits means ‘any consideration for employment provided by way of any privilege, service, facility or amenity provided by the employer to the employees’. The fringe benefit tax was temporarily suspended in the 2009 Union budget of India by the then Finance Minister Pranab Mukherjee, now rebirth with U/S194R?

Whether TDS under Section 194R is Against the ‘Ease of doing business concept’

The Ease of Doing Business (EoDB) index is a ranking system established by the World Bank Group. In the EODB index, ‘higher rankings’ (a lower numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights. Among the chosen 190 countries, India ranked 63rd in Doing Business 2020. India as one of the top 10 improvers, for the 3rd time in a row, with an improvement of 67 ranks in 3 years. By imposing Compliance burden to the business entity whether we will be able to maintain / improve our ranking?

Conclusion

If aim of Government of India (GOI) to generate revenue then they have scope to increase the same by straight way to increase the rate of Income Tax, GOI take the back door lead to compliance burden on the Tax payer and litigation followed by inspector Raj.