All about the new TDS section 194R
Introduction to TDS 194R - TDS on business promotion expenditure
Introduction to TDS 194R
The Finance Bill 2022 introduced a new TDS section 194R to the Income Tax Act, 1961 according to which any benefit or perquisites given on behalf of a Business or Profession are liable for TDS deduction. This will come into effect from 1st July 2022.
Earlier, the perquisites/benefits given to service providers in terms of business or profession were not being accounted for as it was not under the purview of TDS. Now, with the introduction of 194R, even such benefits given in any form are considered for TDS deduction.
For example, a social media influencer who is given certain products of the company for promotional activity. Earlier, even if the product was retained by the influencer after the activity, the benefit was out of tax. But, now, with 194R, such benefits will be taxed in the hands of the influencer.
Provisions u/s 194R of Income Tax Act
Any person or entity who provides any form of benefit/prerequisite to another resident and the benefit value exceeds Rs 20000 in a year will be responsible to deduct TDS u/s 194R.
The tax will have to be deducted at a rate of 10% of the value of the benefits provided.
If the deductor is an individual or HUF, whose total sales/gross receipt/gross turnover of business/profession is below Rs 1 Cr / Rs 50 Lakhs (resp.), in such a case, the deductor does not have to deduct TDS.
The benefit/perquisite may or may not be convertible into cash, but if it arises from carrying out business or a profession, then TDS deduction is a must.
No TDS to be deducted, if the benefit or perk does not exceed Rs 20,000 per person in a financial year.
Guidelines on Applicability of New TDS u/s 194R
The guidelines are as under:
- There is no requirement on the part of the deductor to check whether the amount of benefit or perquisite will be taxable u/s 28(iv), in the hands of the recipient. Whether or not the amount is taxable in the hands of the recipient, the deductor has to deduct tax.
- It is not necessary that the benefit/prerequisite has to be in kind. It can be wholly in cash or wholly in kind or partly in cash and partly in kind.
- TDS u/s 194R has to be made even if the benefit/prerequisite is in the nature of Capital assets like car, land, etc.
- It is clarified that TDS u/s 194R need not be made on sales discount, cash discount and rebates allowed to customers. However, TDS will be applicable on free samples.
- Also, in cases where the director or employee or his relatives enjoy the benefit given to an entity, TDS should be made in the name of the entity.
For example, free medicine samples may be provided by a company to a doctor who is an employee of a hospital. The TDS under section 194R of the Act is required to be deducted by the company in the hands of the hospital as the benefit/prerequisite is provided to the doctor on account of him being the employee of the hospital.
- The valuation of the benefit/perquisite shall be based on its fair market value except in the following cases-
- The benefit/perquisite provider has purchased the benefit/prerequisite before providing it to the recipient. In that case, the purchase price shall be the value for such benefit/perquisite
- The benefit/perquisite provider manufactures such items given as benefit/prerequisite, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite
GST will not be included for the purpose of valuation
- When products are given to social media influencers by the manufacturer, to speak about the product, and the product is retained by them, then TDS u/s 194R will have to be made. However, if the product is returned to the manufacturer, then TDS will not be applicable.
- In case of reimbursement of expenses incurred by the service provider, TDS u/s 194R will be applicable. However, if the invoice for the expenses is the name of the service recipient, then TDS u/s 194R will not be applicable.
- The expenditure pertaining to a dealer/business conference would not be considered a benefit/prerequisite for the purposes of section 194R of the Act in a case where a dealer/business conference is held with the prime objective to educate dealers/customers.
- Section 194R requires that if the benefit/perquisite is in kind or partly in kind, and cash is not sufficient to meet TDS, then the provider of the benefit/perquisite has to ensure that the tax relating to it has been paid, before releasing the benefit. For this purpose, the deductor may rely on a declaration along with a copy of the advance tax payment challan provided by the recipient. The same would be required to be reported in form 26Q along with the challan number.
- Alternatively, the deductor may deduct the tax u/s 194R, in which case the TDS made will also be considered as a benefit. This will also be required to be reported in form 26Q.
- For the purpose of determining the threshold of twenty thousand rupees, the aggregate value of the benefit will have to be considered from 1st April 2022, even though section 194R comes into force from 1st July 2022.
- Any benefit provided up to 30th June 2022 will not be subject to TDS, but will only be considered for the purpose of determining the threshold.
For example, benefit provided up to 30th June 2022 is Rs.40000 and the benefit provided on 6th July is Rs.10000. In this case, TDS will be made on the amount of Rs.10000 on 6th July, since the aggregate value from 1st April has exceeded Rs.20000. The amount of Rs.40000 will not be subject to TDS even though it crosses the threshold of Rs.20000, since it is provided prior to 1st July 2022.
What are the different scenarios of TDS u/s 194R?
- When external distributors of a biscuit company exceed their sales target, a mobile phone of Rs.36000 is given to the distributor as a gift, and a total TDS amount of Rs.3600 is to be deducted by the biscuit company.
- Safety pin manufacturing company gives its employee a bonus of Rs.10000 for being a champion in an internal safety standards event, TDS amount of Rs.1000 is to be deducted and paid to the government.
- A car modification company gives a free car stereo to its employee for bringing in 10 new customers in a particular month. If the cost of the stereo is at Rs.25000, the TDS amount of Rs.2500 is to be recorded and submitted.
In addition to the above guidelines, CBDT has issued some more guidelines to remove the difficulties faced by the stakeholders vide Circular No. 18 of 2022 dated 13th September 2022. The guidelines are produced below:
- Waiver or settlement of loan is considered as benefit/perquisite to the borrower. However, in order to remove difficulties, it is clarified that one time loan settlement with borrowers or waiver of loan granted on reaching settlement with borrowers by the following Institutions shall not be subjected to TDS u/s 194R:
- Public Financial Institution as defined in clause (72) of section 2 of the Companies Act 2013
- Scheduled Bank as defined in clause (ii) of the Explanation to clause (viia) of subsection (1) of section 36 of the Income Tax Act
- Cooperative bank (other than a primary agricultural credit society) as defined III the Explanation to sub-section (4) of section 80P of the Income Tax Act
- Primary co-operative Agricultural and Rural Development Bank as defined III the Explanation to sub-section (4) of section 80P of the Income Tax Act
- State Financial Corporation being a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporation Act, 1951
- State Industrial Investment Corporation being a Government company within the meaning of sub-section (45) of section 2 of the Companies Act 2013, engaged in the business of providing long-term finance for industrial projects
- Deposit taking Non-Banking Financial Company as defined III clause (e) of the Explanation 4 to section 43B of the Income Tax Act
- Systemically Important Non-deposit Taking Non-Banking Financial Company as defined in clause (g) of the Explanation 4 to section 43B of the Income Tax Act
- Public company engaged in providing long term finance for construction or purchase of houses in India for residential purpose and which is registered in accordance with the guidelines/direction issued by the National Housing Bank formed under National Housing Bank Act 1987
- Asset Reconstruction Companies registered under section 3 of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act 2002
- Where the expenses were incurred by the service provider on behalf of the service recipient, and the expenses subsequently reimbursed by the recipient, it was clarified that TDS u/s 194R will apply. It is now further clarified that, if the expense is incurred by the service provider as a ‘Pure Agent’ as per the GST Act, and the same is reimbursed by the recipient, it will not be treated as benefit/perquisite for the purpose of Section 194R.
- Vide CBDT Circular No. 715 dated 8th August 1995, it was clarified that TDS u/s 194C and 194J should be made from gross amount of the bill including reimbursement.
Further it is clarified that, if the out of pocket expenses (reimbursement) is already part of the consideration in the bill on which tax is deducted under relevant sections, other than Section 194R, there will be no further liability for TDS u/s 194R, since the reimbursement would have already suffered TDS u/s 194C or 194J as the case may be.
- Expenses on dealer conferences to educate dealers are not considered as benefit/perquisite as per clarification issued vide Circular No.12 of 2022. It is further clarified that all dealers need not be invited to such conference. Any expenses incurred for the period prior to and after the conference will be treated as benefit/perquisite. However a day prior and after will be given relaxation.
If the benefit/perquisite is provided in a group activity and it is difficult to assign the benefit to each participant, the service provider may, at his option, not claim such expense while computing his Total Income. In such case he will not be required to deduct tax u/s 194R.
- When a person gifts a depreciable asset to another person, and has deducted tax u/s 194R in respect of it, the recipient can claim depreciation on the said asset while computing his income under the head ‘Profits and gains of business or profession’.
- The provisions of Section 194R will not be applicable on any benefit/perquisite provided by an organization in scope of The United Nations (Privileges and Immunity Act) 1947, an international organization whose income is exempt under specific Act of Parliament (such as the Asian Development Bank Act 1966), an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign state.
- It is clarified that issuance of bonus shares or right shares by a company in which public are substantially interested (a Public Company) will not be subject to tax deduction u/s 194R, if bonus shares are issued to all shareholders or right shares are offered to all shareholders.
These practices allow to reduce tax leakage as there are wide transactions which are difficult to capture. These figured up to 50% of unaccounted revenue in TDS. Social media influencers and doctors are the foremost to watch out for this new bill but are made for all citizens of India and for the benefit of all.
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