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:
Points to be Considered–
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.
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.
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.