Are you giving Freebies to Dealers/Distributors/ Employees/ Business partners, then from 1 July 2022 you need to deduct TDS under Section 194R

The Income Tax Department observed that many companies claimed expenses for business promotions by offering various gifts/perks/benefits to its dealer u/s 37 of Income Tax Act 1961. However, the majority of Dealers/Distributors/ Business partners did not declare the said gifts/perks/benefits under business income u/s 28(iv) of Income Tax Act, 1961. So, to track the undeclared income, this benefit received by resident dealers is applicable for TDS u/s 194R by the provider of such benefit.

Tax Deducted at Source (TDS) u/s 194R is a newly introduced section in the Income Tax Act, 1961 effective from 1st July, 2022. This provision is inserted through Finance Act, 2022. This section provides for deduction of tax at source @10%, by any person, providing any benefit or perquisite, exceeding Rs. 20,000 in value, in a year, to a resident, arising from the business or profession of such resident, irrespective of whether it is further taxable in the hands of the recipient.

Valuation of Benefit

The benefits or perquisites are valued on the fair market value, except in the following cases:

  • If the provider purchases such benefits or perquisites, then it shall be valued at the purchase price.
  • If the provider has manufactured the benefits or perquisites, then it shall be valued at the price which is charged to the customers.

Points to be Considered

  • It is applicable to all assessee (other than Individual & HUF) and Individual & HUF having turnover above Rs. 1,00,00,000 or professional receipt is above Rs. 50,00,000 in the previous year 2021-22 and assessment year 2022-23.
  • For calculating the aggregate limit of Rs. 20,000 whole financial year is to be considered and not period after 1st July, 2022.
  • Capital assets like cars, lands, etc. given as benefits or perquisites would be covered within the ambit of deduction of tax at source under section 194R.
  • No tax is required to be deducted under section 194R on sales discounts, cash discounts, and rebates allowed to customers.
  • The provisions 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.
  • The CBDT has clarified that GST will not be included for the purpose of the valuation of benefit or prerequisite for TDS under section 194R. 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):

1) When a person gives incentives (other than discount, rebate) in the form of cash or kind

2) When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets

3) When a person provides free ticket for an event

4) 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.

  • The benefit or perquisite referred to in this new section 194R is not the perquisite u/s 17(2), under the head salary income, paid or payable by the employer to employees. (For perquisite u/s 17(2), TDS section 192 is available).
  • Gifts, perks or benefits provided on some special occasions like festivals (Eg. Diwali sweets), marriage occasions, etc. may not be liable for tax deduction at source, as section 194R contemplates to cover only those benefits or perquisites, which arise out of business or profession & Gifts, perks or benefits provided are not in relation to business of resident person (Eg. Honorarium given to resident person) are also not liable for tax deduction at source. 
  • These 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. 
  • If the product given by manufacturing company to the social media influencer for promotion of those product are retained by them, then only, tax is required to be deducted as per this section 196R. 
  • The expenditure pertaining to dealer conference would not be considered as benefits or perquisites for the purpose of section 194R in a case where dealer conference is held with the prime objective to educate dealers regarding the product and its promotion. Exception to this condition are as follows:
  • Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/business conference
  • Expenditure incurred for family members accompanying the person attending dealer/business conference
  • Expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such conference

Examples

M/s XYZ Ltd. has a turnover above Rs. 1,00,00,000 or professional receipts above Rs. 50,00,000 in PY 2021-22 and AY 2022-23. Below given are the benefits or perquisites provided:

1) Mr. A (resident dealer) was provided with a holiday package amounting to Rs. 40,000 on 31st May, 2022 achieving the target for FY 2021-22. Here, section 194R is not applicable since it is given before the effective date of application of the section.

2) Mr. B (resident dealer) was provided with a holiday package amounting to Rs. 50,000 on 31st July, 2022 on achieving the target for FY 2021-22. Here, section 194R is applicable since it’s after the effective date and exceeds the given limit of Rs. 20,000.

TDS will be calculated on the amount of Rs. 50,000. The date of deduction u/s 194R will be 31st July, 2022, and the rate applicable is 10%. TDS amount will be Rs. 5,000 were challan to be deposited by 7th August, 2022.

3) Mr. C (resident employee) was provided with a holiday package amounting to Rs.70,000 on 31st July, 2022 on achieving the target for FY 2021-22. Here, section 194R is not applicable since it is provided to the resident employee which will be added to the salary and TDS will be deducted u/s 192.

Conclusion:

By Introduction of Section 194R, the Government has bought business promotions via offering various gifts/perks/benefits under the Income-tax Net. This provision will have a major impact on Business Promotion expenses by Companies across various sectors such as Pharma, FMCG, Cement, Ecommerce, Finance Companies etc and these Companies will now have to revisit the way in which Business promotion expenses are incurred.

Author Bio

Qualification: CA in Practice
Company: Bauva & Co. Chartered Accountants
Location: THANE, Maharashtra, IN
Member Since: 14 Feb 2019 | Total Posts: 3
Hi, I am Hardik Bauva qualified in November 2011. A Chartered accountant by profession, i have over 7 years of rich experience in various fields Statutory audit, Internal control compliances, Tax audits and certifications View Full Profile

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