Withholding Tax on benefits or perquisites in respect of business or profession
Section 194R is a new Tax Deducted at Source (TDS) Section introduced by the Finance Act, 2022 (w.e.f. 1 July 2022) that casts responsibility on the payer to withhold tax at 10% on the value of any “benefit” or “perquisite” provided to a resident, arising from his business or exercise of a profession.
Under the Income-tax provision, the value of any ‘benefit’ or ‘perquisite’ received, whether convertible into money or not, arising from business or profession, is assessable as business income. It was observed that many times, the taxpayers do not report the receipt of taxable benefits or perquisites, especially those received in kind; hence, such income remains out of the tax authorities' radar. To catch hold of such transactions and to widen and deepen the tax base, the provision of Section 194R was introduced effective from 1 July 2022.
Key features of Section 194R
The key features of section 194R are as under:
- What kind of payment is covered: Any ‘benefit’ or ‘perquisite’ arising from business or exercise of the profession of the recipient.
- Payer: It covers all the persons. However, the individual/ HUF whose total sales/gross receipts/ gross turnover in the immediately preceding financial year does not exceed INR 10 million (in case of business) and INR 5 million (in case of profession) are excluded.
- Payee: Resident of India, TDS rate: 10% on the value of benefit or perquisite.
- Timing of deduction: Before providing benefit or perquisite, where the benefit or perquisite is provided wholly in kind or partly in kind, the person providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that the tax required to be deducted has been paid.
- Threshold limit: Exceeding INR 20,000 per year per recipient.
The Central Board of Direct Taxes (CBDT) has issued guidelines for removal of difficulties in implementing the provisions of Section 194R of the Income-tax Act, 1961 (ITA). The synopsis of the CBDT circular is as under:
|Particulars||CBDT Guidelines relating to applicability of 194R|
|Taxability in the hands of a recipient – whether relevant||Not relevant. TDS needs to be deducted irrespective of the taxability in the hands of the recipient.|
|Value of Perquisite||TDS to be deducted on Purchase Value (Actual Cost Basis) of such benefit or perquisite, if such benefit or perquisite has been purchased before giving the same to the recipient, and in other cases, on Fair Market Value (FMV) of such benefit or perquisite.|
|GST to be factored||GST to be excluded|
|Perquisite in cash or kind or in of capital asset||TDS to be deducted. It covers the benefit or perquisite provided in cash, kind or partly in cash and partly in kind. It also covers the benefit or perquisite provided in the form of capital assets.|
|Sales/cash discount||TDS not applicable.|
|Free medicine samples to medical practitioners||TDS applicable.|
|Where the recipient is government||TDS shall not apply if the benefit or perquisite is being provided to a government entity, like a government hospital, not carrying on business or profession.|
|Out-of-pocket expense||TDS would be required to be deducted even on out-of-pocket expenses, being incurred by the Service Provider, and being reimbursed to him by the Service Recipient, if the Bill/Invoice of such out-of-pocket-expenses is not in the name of Service Recipient. However, if the Invoice/ Bill of such out-of-pocket expenses is in the name of Service Recipient, then TDS provisions under Section 194R would not be applicable.|
|Social media influencer||In case a social media influencer is given a benefit or perquisite being a product like car, mobile, outfit, cosmetics, etc., and the influencer retains the said product, then it will be liable to TDS. In case the same is returned, then such product will not be treated as a benefit or perquisite for the purpose of Section 194R.|
|Transaction with dealer/ distributors||
- Where the expenses are incurred on behalf of/for the company by the service provider, invoices are collected in the name of the company.
- Reading the circular, TDS provisions are attracted on any benefit or perquisite arising in the course of business or profession of the recipient. As such, any waiver of loan or write back of payables etc., one may have to evaluate the applicability of Section 194R.
- Where benefit is provided wholly or partly in kind, one will have to ensure that adequate TDS on the same has been paid before providing such benefit.
- Where any gifts or benefits are provided to the employee or director or owner of any other company on festive occasions etc., one may have to evaluate the applicability of Section 194R.
- Where free samples are provided to the doctor or hospital, one will have to evaluate the FMV of the product to determine the withholding tax.
- Where any product or benefit is given to a social media influencer and the product is retained, tax is required to be deducted.
- While holding events/meetings with dealers and distributors, the company will have to evaluate the applicability of Section 194R on benefits or perquisites provided to them.
Given that Section 194R is a TDS provision, one needs to be mindful of the guidelines provided in the CBDT circular. Every kind of benefit or perquisite provided in the course of business or profession needs to be thoroughly evaluated for the applicability of Section 194R to avoid non-compliance with TDS provisions and consequential implications.