The Finance Act, 2022 had inserted a new section 194R to the Income Tax Act, 1961 providing for deduction of tax at source (TDS) @ 10% on the benefit or perquisite paid to a resident businessman or professional arising from its business or profession, and the provision of this section is applicable from 1st July, 2022. Brief of compliances is as under:
1. Who is liable to deduct TDS under section 194R?
All assessee (other than Individual & HUF) and Individual & HUF having total sales/gross receipts/turnover from business is above Rs. 1,00,00,000 or from profession is above Rs 50,00,000 during the financial year immediately preceding the previous year in which TDS required to be deducted. Therefore, for the year 2022-23, one needs to check the turnover of previous year 2021-22 to determine the applicability of this section in the year 2022-23.
2. What event/transaction attracts provisions of this section:
When any person mentioned in Q1 provides any benefit or perquisite to a resident in cash or in kind or partly in cash and partly in kind, of a value or the aggregate of such benefit/perquisite exceedin Rs.20,000/- in any financial year to a person during the course of business or profession then the provisions of section 194R are applicable w.e.f. 1st July, 2022.
The benefit or perquisite referred to in this new section 194R is not the perquisite u/s 17(2), under the head salary income, paid or payable by the employer to employees, as perquisite u/s 17(2) on which TDS is deductible under section 192 of Income Tax Act 1961.
2. What is the rate of Tax required to deducted?
Tax shall be deducted at the rate of 10% of value of benefit or perquisite, in cash or kind, also ensure it should be deducted before paying/providing such benefits/perquisites.
3. How the value benefits or perquisites shall be calculated:
CBDT has clarified that GST will not be included for the purpose of valuation of benefit/perquisite for TDS under section 194R of the Act. For example, if a company gives TV/Fridge to any consultant/agents etc then it will be valued as per the market value of that brand & model. If the company provide any pleasure trip for free of cost, to any consultant/agent or to their family, then the whole value paid for arranging trip shall be the value of benefit provided. If, free samples of medicines are given, then market value of medicines shall be the value of perquisite.
4. Is it necessary that the person providing benefit or perquisite needs to check if the amount is taxable in the hands of recipient, before deducting tax under section 194R of the Act?
No. The deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient. The deductor must deduct TDS even if the benefit/perquisite is capital asset/fixed asset in the hands of recipient.
5. Whether sales discount, cash discount and rebates are benefit or perquisite?
Sales discounts, cash discount or rebates allowed to customers from the listed retail price represent lesser realization of the sale price itself. Purchase price of customer is also reduced to that extent.
Logically these are also benefits though it is related to sales/purchase. Since TDS under section 194R is applicable on all forms of benefit/perquisite, tax is required to be deducted. However, it is seen that subjecting these to tax deduction would lead to difficulty. To remove such difficulty, it is clarified that no tax is required to be deducted under section 194R of the Act on sales discount, cash discount and rebates allowed to customers.
There could be another situation, where a seller is selling its items from its stock in trade to a buyer. The seller offers two items free with purchase of 10 items. In substance, the seller is actually selling 12 items at a price of 10 items. Let us assume that the price of each item is Rs 12. In this case, the selling price for the seller would be Rs 120 for 12 items. For buyer, he has purchased 12 items at a price of 10. Just like seller, the purchase price for the buyer is Rs 120 for 12 items and he is expected to record so in his books. In such a situation, again there could be difficulty in applying section 194R provision. Hence, to remove difficulty it is clarified that on the above facts no tax is required to be deducted under section 194R of the Act. It is clarified that situation is different when free samples are given, and the above relaxation would not apply to a situation of free samples.
Similarly, this relaxation should not be extended to other benefits provided by the seller in connection with its sale. To illustrate, the following are some of the examples of benefits/perquisites on which tax is required to be deducted under section 194R of the Act (the list is not exhaustive):
The above examples are only illustrative. The relaxation provided from non-deduction of tax for sales discount and rebate is only on those items and should not be extended to others.
It is further clarified that these benefits/perquisites may be used by owner/director/employee of the recipient entity or their relatives who in their individual capacity may not be carrying on business or exercising a profession. However, the tax is required to be deducted by the person in the name of recipient entity since the usage by owner/director/employee/relative is by virtue of their relationship with the recipient entity and in substance the benefit/perquisite has been provided by the person to the recipient entity.
To illustrate, the free medicine sample 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 hospital as the benefit/perquisite is provided to the doctor on account of him being the employee of the hospital. Thus, in substance, the benefit/perquisite is provided to the hospital. The hospital may subsequently treat this benefit/perquisite as the perquisite given to its employees (if the person who used it is his employee) under section 17 of the Act and deduct tax under section 192 of the Act. In such a case it would be first taxable in the hands of the hospital and then allowed as deduction as salary expenditure. Thus, ultimately the amount would get taxed in the hands of the employee and not in the hands of the hospital. Hospital can get credit of tax deducted under section 194R of the Act by furnishing its tax return. It is further clarified that the threshold of twenty thousand rupees in the second proviso to sub-section (1) of section 194R of the Act is also required to be seen with respect to the recipient entity.
Similarly, the tax is required to be deducted under section 194R of the Act if the benefit or perquisite is provided to a professional who is working as an employee in any entity. In this case the benefit or perquisite provider may deduct tax under section 194R of the Act with entity as recipient and then entity may again deduct tax under section 194R of the Act for providing the same benefit or perquisite to the employee. To remove difficulty, as an alternative, the original benefit or perquisite provider may directly deduct tax under section 194R of the Act in the case of the employee as a recipient. The provision of section 194R of the Act shall not apply if the benefit or perquisite is being provided to a Government entity, like Government hospital, not carrying on business or profession.
6. Whether reimbursement of out-of-pocket expense incurred by service provider in the course of rendering service is benefit/perquisite?
Any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession.
Let us assume that a consultant is rendering service to a company for which he is receiving consultancy fee. While rendering that service, he has to travel to different city from the place where is regularly carrying on business or profession. For this purpose, he pays for boarding and lodging expense incurred exclusively for the purposes of rendering the service to the company. Ordinarily, the expenditure incurred by the consultant is part of his business expenditure which is deductible from the fee that he receives from company. In such a case, the fee received by the consultant is his income and the expenditure incurred on travel is his expenditure deductible from such income in computing his total income. Now if this travel expenditure is met by the company, it is benefit or perquisite provided by company to the consultant.
However, sometimes the invoice is obtained in the name of company and accordingly, if paid by the consultant, is reimbursed by company. In this case, since the expense paid by the consultant (for which reimbursement is made) is incurred wholly and exclusively for the purposes of rendering services to the company and the invoice is in the name of company, then the reimbursement made by company being the service recipient will not be considered as benefit/perquisite for the purposes of section 194R of the Act.
If the invoice is not in the name of company and the payment is made by company directly or reimbursed, it is the benefit/perquisite provided by company to the consultant for which deduction is required to be made under section 194R of the Act.
7. If there is a dealer conference to educate the dealers about the products of the company – Is it benefit/perquisite?
The expenditure pertaining to dealer/business conference would not be considered as benefit/perquisite for the purposes of section 194R of the Act in a case where dealer/business conference is held with the prime object to educate dealers/customers about any of the following or similar aspects
However, such conference must not be incentives/benefits to select dealers/customers who have
Further, in the following cases the expenditure would be considered as benefit or perquisite for the purposes of section 194R of the Act:-
8. Section 194R provides that if the benefit/perquisite is in kind or partly in kind (and cash is not sufficient to meet TDS) then the person responsible for providing such benefit or perquisite is required to ensure that tax required to be deducted has been paid in respect of the benefit or perquisite, before releasing the benefit or perquisite. How can such person be satisfied that tax has been deposited?
The requirement of law is that if a person is providing benefit in kind to a recipient and tax is required to be deducted under section 194R of the Act, the person is required to ensure that tax required to be deducted has been paid by the recipient. Such recipient would pay tax in the form of advance tax. The tax deductor may rely on a declaration along with a copy of the advance tax payment challan provided by the recipient confirming that the tax required to be deducted on the benefit/perquisite has been deposited. This would be then required to be reported in TDS return along with challan number. Provisions for reporting such transactions has been included in Form 26Q.
Example 1:Cash amounting to Rs. 1 Lakh and a car (suppose cost is 8.5 lacs) is to be given by ABC Limited directly to a consultant, then ABC Limited has to deduct TDS on Rs. 1 lakh + 8.5 lakhs @10%, that is Rs.95,000/-. Ultimately, company shall pay only Rs.5,000/- in cash after deducting 95,000/- as TDS.Now in the above example if car is costing Rs.10.5 lakhs along with 1 lakh cash incentive then TDS amount shall be Rs.1.15 lakhs to be deducted from consultant by company, which is more than cash incentive of Rs.1 lakh, then two situations would arise:
The consultant is in self-practice, and is not associated with any other company or entity, then it is responsibility of consultant to deposit as advance tax for Rs.15,000/- and ABC Limited shall pay Rs.1 lakh as TDS in the name of Consultant and it is the responsibility of the ABC Limited to check whether consultant has deposited the advance tax or it can rely on a undertaking from consultant along with Advance Tax challan that he has deposited the advance tax before using the car.
The consultant is not in self-practicing and is employee of a XYZ Limited, then it is responsibility of XYZ Limited to deposit Rs.15,000 as advance tax and ABC Limited shall deduct Rs.1,00,000/- as TDS in the name of XYZ Limited on account of consultant being the employee of the XYZ limited and it is The responsibility of ABC Limited to check whether the XYZ Limited has deposited advance tax or he can take in writing from hospital a undertaking that they have deposited the advance tax along with Advance Tax challan before allowing consultant to use car given by ABC Limited.
If a company is organizing a pleasure trip for the agents/consultants, then the agent/consultant shall deposit 10% of the cost of the trip as advance tax before start of that trip and take declaration that he has deposited the advance tax.
It is mandatory to deduct & deposit before releasing the benefits/perquisites.
9. Section 194R would come into effect from the 1st July 2022. Second proviso to sub- section (1) of section 194R of the Act provides that the provision of this section does not apply where the value or aggregate of value of the benefit or perquisite provided or likely to be provided to a resident during the financial year does not exceed twenty thousand rupees. It is not clear how this limit of twenty thousand is to be computed for the Financial Year 2022-23?
It is hereby clarified that,-
