Section 194R of the Income Tax Act deals with the taxation on any kind of benefits and perquisites received by an individual from a business or profession. This section applies to both monetary and non-monetary benefits and perquisites
Scope And Coverage Of Section 194R
- The deductor is not required to check whether the benefit or perquisite is taxable in the recipient’s hands under any of the provisions of the Income Tax Act.
- There is no requirement to check whether the amount itself is taxable or not
- Section 194R of the ITA applies in all cases where the benefit or perquisite is:
- Wholly in cash
- Wholly in kind
- Partly in cash and partly in kind
- Benefit or perquisite can also provide a capital asset (for example, car, land, etc.)
- Applicable on benefits or perquisites paid or credited on or after 1st July 2022
Why was Section 194R introduced?
The government introduced section 194R of the Income Tax Act to discourage the evasion of taxes. Many companies used to give their dealers gifts, perquisites, and other benefits for promotions and claimed deduction of expenses from the business income. Also, the individuals receiving the benefit did not report this income, as it was in kind. This led to the evasion of taxes. Therefore, the government introduced section 194R, which states that any benefit, whether in cash or kind, received by a resident individual from a business or profession is liable for tax.
Here’s an example – Suppose ABC Ltd. is a car manufacturing company that decides to give cars as incentives to dealers on meeting their annual targets. The companies used to show this as a business expense and used to claim a deduction of expenses. Since the introduction of section 194R, all the benefits extended by a business or profession in the form of cash and kind are taxable. Section 194R has thus helped the government keep track of income and prevent tax evasion.
Sales Discounts, Cash Discounts, And Rebates
- Sales discounts, cash discounts, and rebates allowed to customers from the listed retail price represent a lesser realisation of the sale price itself. To that extent, the purchase price is also reduced. Logically, these are benefits, but to remove the potential difficulty for the seller, no TDS is deducted on sales discounts, cash discounts, or rebates allowed to customers.
- Freebies provided on purchases of some items (for example, one item free on purchase of four items) are not to be subjected to Section 194R
- However, Section 194R applies here:
- When a person gives incentives (other than a discount or rebate) in cash or kind such as a car, television, computer, gold coin, mobile phone, etc.
- Sponsoring a trip for the recipient and their relatives upon achieving specific targets.
- Providing a free ticket for an event.
- Providing free medical samples to doctors
Reimbursement Of Out-of-pocket Expenses
- If any expenditure (the liability of the person carrying on business) is met by or reimbursed by some other person, then the same would be regarded as a benefit or perquisite for the person who had the primary liability of incurrence. For example, travel expenses reimbursed by the consultant’s client would be regarded as a benefit or perquisite liable for TDS.
- However, there is no requirement for TDS if travel bills are in the name of the client, paid by the consultant, and reimbursed by the client.
Social Media Influencer
As per the guidelines, determining if there is a benefit or not will depend on the facts of the case:
- If the product given to the social media influencer was returned, there is no benefit and, hence, no TDS u/s 194R
- However, if the product was retained, then it would be like a benefit or perquisite
Valuation Of Perquisite Or Benefits
The valuation would be the fair market price (FMV) of benefit/perquisite except in the following cases:
- If the provider has purchased the benefit/perquisite, then the purchase price shall be taken as the value for TDS purposes
- If the provider manufactures such items given, then the price that it charges to customers for such items shall be taken as the value for TDS purposes.
- Goods and Services Tax (GST) will not be included for valuation purposes
Dealers’ Conferences
- Guidelines mention that expenditure pertaining to dealer/business conferences will not be considered as a benefit or a perquisite if such conferences are held with the primary object of educating dealers/customers on the following:
- Launch of a new product
- Obtaining orders from dealers/ customers
- Teaching new sales techniques to dealers
- Addressing queries from dealers
- Reconciliation of accounts
How is the TDS deducted under Section 194R?
The benefit provider shall deduct the TDS before releasing them. It is the provider’s responsibility to deduct the TDS from the amount before providing such perquisites.
Here are a few ways to deduct TDS –
- The payer can either gross up the net amount or pay the TDS from his own pocket.
- The payee can give cash to the payer to meet the TDS liability. The payer then deposits the same with the government.
- If the payee has a credit balance with the payer, the payer can use it to deduct the tax and pay the net amount to the payee.
FAQs
What is the Applicability of Section 194R?
This section is applicable if any individual receives monetary or non-monetary gifts, perks, or incentives in either cash, kind, or both from a person carrying on any business or profession. The value of such perquisites or benefits should also exceed INR 20,000
When Does Section 194R Not Apply?
- Section 194R does not apply in cases where there exists an employer-employee relationship. When an employee receives benefits from an employer, it is taxed under section 192.
- In case the recipient of the benefit is a non-resident Indian, then tax is deducted under section 195.
- If there is no business relationship between the two transacting parties, then tax will not be deducted.
- TDS is not deducted if the total value of the benefit is less than INR 20,000.
- Not applicable to Individuals and HUFs with an annual sales or turnover of less than INR 1 crore for business and INR 50 lakhs for a profession.