TDS on Benefits or Perquisites – decoding Section 194R of Income Tax Act, 1961
Many companies offer multiple kinds of benefits and incentives for example, gifts cards, travel packages or vouchers or gift cards, etc. Distributors agents, channel partners or dealers, to encourage and inspire them to encourage the growth of their company. To control the taxability of these benefits or perquisites, government introduced Section 194R into the Finance Act, 2022. Section 194R places an obligation to the person who is responsible for providing any perquisite or benefit the resident to take deductions of tax at the 10% at the source
Additionally, CBDT rolled out a circular that outlines certain guidelines for section 194R in order to eliminate any obstacles in the application of section. In this article it will help us, one at a time be able to comprehend the requirements of section 194R as well as the rules and regulations pertaining to it.
Section 194R Tax Deduction on Benefits or Perquisites for the business or Profession
Let's first take a examine the provisions of section 194R regarding TDS regarding benefits or entitlements with regard to the profession or business. According to Section 194R, the Income Tax Act, anyone who is responsible for providing residents, any benefit or perquisite that is derived from business or practice of a profession by the resident, has to make sure that tax has been deducted from such benefit or perquisite at ten percent of the value total of the benefit or perquisite prior to providing that benefit or perquisite to the resident
In the following paragraph, the article states that in the next two instances the person accountable for benefits or perquisites should prior to releasing the benefit, verify that the tax that must be taken out has been paid for the benefit or perquisite
- when the benefit or benefit is completely in cash or
- when the benefit or perquisite is in kind , and partly cash, however the part in cash isn't sufficient to satisfy the obligations of TDS on the entirety of the perquisite or benefit.
The section further states it is clear that this provision are not applicable if the total value of the benefits or perquisites offered to a resident in the fiscal year does not surpass twenty thousand dollars
This section also would not be applicable to an individual or an HUF with total sales that of up to one crore rupees when it comes to the case of a business, or gross receipts of up to fifty lakh rupees in the case of a profession within the fiscal year immediately preceding the financial year during which such benefit/perquisite was provided by the person.
After having read the provisions above Let us now look at specific aspects of the law which require particular attention
- The first requirement to apply section 194R is to ensure that the benefit or privilege is granted to a resident and the reason for it is due to working or exercising the profession performed by the resident. We will look at some examples below to get an understanding of this provision:
- Mr. A is the owner of an investment company in the FMCG sector. He offers a variety of incentives to agents to help them reach their sales goals. For FY 2022-23 Mr. A offers free tickets for an event to Mr. X, his resident agent. Does this offer fall under the provisions under section 194R?
Yes, the benefitof tickets to an event for free in this instance, given through the Mr. A to Mr. X is within the jurisdiction of section 194R since the Mr. X is a resident of the United States, and this benefit is given as a result of professional or other business performed through the Mr. X.
- The company XYZ produces automobiles and also sells them. Recently, it launched an electric vehicle. It gives free test rides for prospective customers. Does this benefit fall within the scope of Section 194R? Customers are considered to be end-users of the motor vehicle , and are not engaged in any kind of profession or trade to benefit from this offer. Thus, in this instance as the advantage of free test drives was given to consumers who are not businesses this benefit will not be covered under the provisions of the section 194R.
- The other thing worth mentioning in this regard is the fact that section 194R doesn't apply to the benefits or entitlements that result in an employment-employee partnership. The perquisites or benefits offered from an employer its employees are covered by section 17 and the employer is required to deduct tax from the same in accordance with Section 192 under the Act.:
- The taxpayers should also remember that in order for section 194R be effective the person who provides the benefit can be a resident, or a non-resident, however the recipient has to reside in the same state.:
Taxpayers should also be aware that for section 194R's provisions to apply the person who is providing the benefit can be a resident or non-resident, but the person receiving the benefit must be resident. The same is shown below:
||Section 194R Applicability
||Resident with a profession or business
||Section 194R will be in force.
||Resident is an end-user.
||The section 194R is not applicable
||The section 194R is not applicable
In relation to the guidelines issued by CBDT with regard to section 194R, let's go through the following questions-answers to gain a better understanding of the guidelines:
Is the person who provides the benefits or perquisites required to determine if the benefit or perquisite is tax-deductible in the hands of the beneficiary prior to making deductions for taxes pursuant to section 194R?
To take tax deductions under section 194R, the tax deductor is not required to determine if the perquisite or benefit he's offering is tax-deductible at the expense of the recipient, or under which section it is taxable.
Does it have to be a condition that the perquisite or benefit must be in the form of a gift to permit section 194R in the Act to work?
It isn't required to state that the reward or privilege be in the form of a gift in order for section 194R under the Act to be in force. The benefit or perquisite could be paid in cash or in kind or in part cash and partially in the form of..
Does it have to deduct taxes under Section 194R in the Act when the perquisite, or benefit is an asset that is capitalized?
Yes, the tax deductor is required to deduct tax under section 194R in the Act in every instance where the benefit or incentive is offered regardless of regardless of whether it's in form of capital or the revenue type..
Are TDS applicable to cash discount, sales discount, and rebates in section 194R?
According to the guidelines published by the CBDT The CBDT has stated that there is no tax to be taxed under section 194R on sales discount, cash discount and rebates offered to customers.
But, these guidelines stipulate that this exemption cannot be extended to any other benefits that the seller offers as a result of the sale. Here are a few examples of advantages or privileges that tax is required in accordance with section 194R of the Act:
- if a person offers incentives (other than rebate, discount) in the in the form of cash or other items like TV, computers cars, gold coins or mobile phone.
- If someone offers free tickets to an event
- f a person is able to sponsor an expense to the recipient and family members upon meeting certain goals
- When someone gives medicine samples for free to doctors
How do you calculate the value of the benefit/perquisite TDS pursuant to section 194R?
The estimation of the perquisite or benefit is based on their fair market value, except in the following situations:
The person who provides the benefit or benefit has bought the benefit prior to handing it over to the person receiving it. In this situation the price paid for it will be considered to be the value of the benefit or condition.
The individual who is providing the benefit/perquisite makes the item that is provided in perquisite or benefit. In this case, the price the benefit/perquisite provider charges its customers for such items shall be the value for such benefit/perquisite. The circular further clarifies that GST will not be included for the purposes of valuation of perquisites for TDS under section 194R.
A lot of times the social media influencer receives a product from an industry company in order they can make use of the product to record audio/video messages about the product on social media. Was this product provided to the influencer as a benefit or as a perquisite?
If this is an advantage or a perquisite under section 194R depends on whether the product has been kept by the influencer or not. It is by following:.
What is the appropriate amount of reimbursement for costs incurred out of pocket by a service provider during the course of providing services is a benefit or a requirement?
Whether reimbursement of the expenses out of pocket incurred by a service provider providing services is an entitlement or benefit under section 194R will again depend on two circumstances:
Do business meetings that are held to inform dealers on the products of the company be considered a profit or a requirement for section 194R?
The cost of an event for business or dealers is not considered to be an exemption under Section 194R in the Act when the conference is organized with the primary goal of educating dealers or clients on any of the following factors:
- New products are launched
- Discussion on why this new item is different over other products
- training sales techniques for dealers/customers
- receiving orders from customers or dealers
- Answering the questions of customers or dealers
- Reconciliation of the accounts between customers or dealers
But, such a gathering shouldn't be focused on incentives or benefits to customers or dealers who have met specific goals.
The circular also provides situations where the expenses on the conference may be considered to be a profit in the context subsection 194R. The cases are as follows:
- The expenses associated with leisure travel or leisure components even if they are related to the conference.
- The cost of expenses incurred by relatives of those who are attending the conference.
- Costs for lodging of conference participants during the days preceding or following the dates of the conference.
Section 194R stipulates that, if the benefit/perquisite provided is in the form of a gift or partially in cash and the amount isn't enough to satisfy the TDS obligation the person accountable for the provision of such perquisite or benefit has to ensure that the tax to be deducted was paid for the benefit or perquisite before releasing the benefit or
he law states that if the person is providing benefit or compensation in the form of a gift to a recipient and tax is due to be deducted in accordance with subsection 194R under the Act the person must ensure that the tax taken out was payed by the person receiving the benefit. The recipient is required to pay the tax as an advance tax. The benefit provider can use a declaration as well as an original copy of the challan for advance tax payment provided by the beneficiary to confirm that the tax to be deducted from the perquisite or benefit was paid. It will then have to be recorded on the TDS return, along with the challan's id. This year, form 26Q was amended to include reporting provisions these transactions.
If you want to avoid the issue and/or issue the benefit provider could be able to deduct the tax in accordance with 194R in the Act and pay it back to the Government. The benefit recipient should be able to deduct tax based on how the tax that he has paid in the form of TDS is an additional benefit under the provisions of 194R. On Form 26Q, he must show the tax deduction on the benefit received.
Section 194R will be in force starting when? What is the best way to calculate the maximum of 20 thousand for Financial Year 2022-23?
Section 194R is effective on July 1, 2022.
In the circular released by the CBDT the CBDT has clarified that, as the limitation of 20000 rupees is for the fiscal year, the amount of all benefits that are provided beginning on 1stApril, 2022 through 31st March 2023 could be taken into consideration when the calculation of the total value of perquisites or benefits to determine the effect of section 194R to FY 2022-23. But, the benefit or perquisite that is provided up to the date of 30 30 June 2022 will not be subject to TDS under section 194R in the Act.
Consider this example: Let's say you grant perquisites to the resident twice in FY 2022-23: first on May 17, 2022, in the sum of Rs. 10,000 and then on the 6th November2022, which is 15,000. 15,000. In this instance to determine the adequacy of section 194R on the basis of the threshold of the amount of Rs. 10,000 is added to the total amount of Rs. 15,000 and the sum of Rs. 25 lakh will be considered in FY 2022-23.
However it is possible to take deductions for any tax on this perquisite by the 6th November 2022 i.e. 15,000 Rs. 15,000, and not the total sum of. 25,000 as the sum of Rs. 10,000 is the amount of the initial transaction that was completed prior to 1stJuly 2022.
It is evident that section 194R seeks to bring a variety of transactions which are made to provide diverse benefits to different parties within the taxation system directly from the source of source. Thus, from now onwards taxpayers have to be aware of transactions in the context of benefits and entitlements and be familiar with the latest TDS-related the provisions.
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