TAXABILITY OF BENEFIT OR PERQUISITE-Section 194R
TAXABILITY OF BENEFIT OR PERQUISITE-Section 194R
Providing benefits and perquisites/dealer incentives in cash as well as non-cash form is very common practice while doing business. This type of benefits not only provides psychological satisfaction but also keeps the business partners motivated. It becomes a new norm that businesses have started spending funds for providing benefits in the form of discount coupons, foreign trips etc. to their partners, employees. The government have noticed that such benefits were not properly disclosed by the recipient in their Return under the provision of Section 28(iv) of the Income-tax Act 1961 in which the value of any benefit or perquisite, arising from business or profession is to be charged as business income in the hands of the recipient of such benefit or perquisite but on the other side providers of such benefits claim the benefit of these perquisite as deductible business expenditure. In order to curb these practices and deepen the tax base, the Government has introduced a new Section 194R to cast the responsibility of withholding tax at the rate of 10% of the aggregate of value of benefit or perquisite on the person providing such benefit to the resident recipient. The withholding of tax is desirable to plug the loopholes.
The Finance Act 2022 inserted a new Section 194R in the Act to be made effective from 1st July 2022 which requires deduction of tax at source @ 10% of the aggregate of value of benefit or perquisite. It is pertinent to note that rationale of introduction of section 194R of the Act as explained in the memorandum to Finance Bill 2022 and the budget speech thereof indicated that the content was to cover any ‘benefit or perquisite’ falling within the scope of section 28(iv) of the Act.
Applicability of Section 194R
Section 194R is applicable to Any person other than Individual/HUF. However, this provision will applicable to Individual/HUF when total sales, gross receipts or turnover does not exceed Rs. 1 crore in case of business or Rs. 50 Lacs in case of profession during the financial year immediately preceding the financial year when benefit/perquisite is received. Under this section, the payee is Resident Person. The Threshold limit to deduct TDS is Rs.20,000 per recipient per annum and deduction of tax at source is @ 10% on the aggregate value of benefit/ perquisite if deductee furnishes his PAN to deductor otherwise rate of TDS is 20% on the aggregate value of benefit/ perquisite if deductee does not furnish PAN to deductor. Section 194R is being sought to cover the footprints of recipient and provider of benefit and perquisite.
Nature of Transactions covered under this Section
It is applicable to “any benefit or perquisite”. However, both words have to be read together and would draw colour from each other. Perquisite denotes meeting out of an obligation of one person by another person either directly or indirectly or provision of some facility by one person to another person who knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege of that person. Benefit also can be interpreted in the same manner i.e.at the execution of business transaction, the one party should give any benefit to another party. These benefits/perquisites can be tangible and intangible. Although, it does not include pure money transactions. Benefit can be partly in kind and partly in cash.
The benefit or perquisite referred in this Section 194R is different from the perquisite u/s 17(2), under the head salary income, paid by employer to employees as another section is there for deduction i.e., 192.
Provider of benefit/perquisite must ensure that tax has been paid before releasing of the benefits or perquisites, in case where they are wholly in kind or partly in kind as the cash component is insufficient for deduction.
Benefit or perquisite which is provided in the form of capital assets are also withing the scope of this section such as car, land etc.
Any perks, gifts or benefits provided on some special occasions may not be liable for tax deduction at source, as section 194R cover only those benefits/perquisites which arise out of business or profession.
Sale of goods or assets at lower price are not yielding any benefit to purchaser. Under section 28(iv) it is the real income which is taxed and not hypothetical income which can be said to accrue on purchase at lower price. So, tax at source will be deducted under this section only when there is actual benefit or perquisite.
There must be a liaison between the business of the recipient and benefit provided to him in order to avail the benefit or perquisite which is arising from business or exercise of a profession.
Valuation of benefit or perquisite
Valuation of benefit or perquisite should be based on its fair market value except in the mentioned below scenarios: -
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If the deductor has purchased the benefit/perquisite before providing it to the recipient-the purchase price of goods given should be the value of the perquisite.
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In the case where the benefit or perquisite provider manufactures such items given as benefit or perquisite, then the price that it charges to its customers for such items shall be the value for such benefit or perquisite.
Reporting in TDS Return
The deductor may deduct the tax and deposit with the Government. The tax should be deducted after taking into account the fact that the tax paid by him as TDS is also a benefit under the Section 194R of the Income Tax Act. This needs to be reflected in Form 26Q as tax deducted on the benefit provided.
Alternatively, the deductor may rely on a declaration along with a copy of the advance tax payment challan provide by the recipient confirming the tax on the benefit/perquisite has been deposited.
Government has given the option to use Advance Tax Challan for the same.
Clarifications Regarding confusion for 194 R:-
There were various difficulties while applying this section but Government has removed these difficulties through various clarifications which are as follows: -
Provider of benefit/perquisite is not required to ascertain whether the benefit or perquisite would be taxable in the hands of recipient.
Sales discount, cash discount and rebates are not liable for deduction under Section 194R on account for practical difficulties.
Certain products provided free of cost then 194R will not be applicable on the cost of 2 products provided free of cost, to avoid genuine difficulty for the seller.
Provision of Section 194R not to apply if benefit/perquisite provided to government entity not doing business or profession.
Valuation of the perquisite must be the fair value or the purchase price of the products or sale price of the products as the case may be.
Social media influencers are also covered under the scope of Section 194R,if the ultimate product for which marketing is done is retained by the social media influencers.
Benefit/perquisite in form of capital assets is also covered within the ambit of Section 194R.
For reimbursement of OPEs incurred during the course of rendering services, for not to be covered under Section 194R, invoices should be in the name of the clients.
In case of doctors receiving free samples of medicines while employed in a hospital, Section 194R would apply on distribution of free samples to the hospital. Section 194R shall not apply if the benefit or perquisite is provided to a government entity, like hospital, not carrying on business or profession.
Ordinarily, the expenditure incurred by a consultant in his business then this expenditure is deductible against his income from the client. Applicability of this section would depend on the name in which invoice for out-of-pocket expenses is made. If the invoice is in the name of client, paid by consultant and reimbursed by the client then such reimbursement would not attract TDS. However, if invoice is not in the name of client and the payment is made by the client directly then it is the perquisite provided by the client to the consultant on which section 194R applies.
The expenditure incurred on Dealers’ Conference would not be subject to TDS if held with the prime object to educate dealers about any of the following or similar aspects.
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new product being launched
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discussion as to how the product is better than others obtaining orders from dealers/customers.
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teaching sales technique to dealers/customers.
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addressing queries of dealers/customers.
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reconciliation of accounts with dealers/customers.
Exception is that such conference must not be in the nature of incentives /benefits to select dealers/customers who have achieved particular targets.
Also, TDS shall apply if expenditure is:
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attributable to leisure trip or leisure component, even if it is incidental to dealer/business conference
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incurred for family members accompanying in the person attending dealer/business conference.
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on participants of dealer/business conferences for days which are on account of prior stay or overstay beyond the dates of such conferences.
Section 194R shall make the businesses providing benefits or perquisites carefully examine each transaction and ensure due compliances with respect to the benefits or perks which one receives due to the business/profession.
For further queries you can contact Sandeep Sehgal, Partner, at sandeep.sehgal@akmglobal.in or Yeeshu Sehgal,Head,Tax Markets at yeeshu.sehgal@akmglobal.in
Authored by Sandeep Sehgal,Partner,Tax and Yeeshu Sehgal,Head,Tax Markets along with inputs from Kanishka Mendiratta,AKM Global.