Understanding Section 194R TDS: Tax Deduction on Benefits and Perquisites.
In the realm of businesses and professions, various entities employ strategies to motivate and incentivize their distributors, channel partners, agents, or dealers, thus promoting business growth. These strategies often involve providing benefits and perquisites such as travel packages, gift cards, incentive schemes, or the use of business assets.
However, with the introduction of the Finance Act 2022, a new provision called Section 194R was implemented to address potential tax revenue leakages and prevent tax evasion in these scenarios.
Summary of Section 194R TDS as per Income Tax Act 1961.
|Applicable From||1st July 2022|
|TDS is to be deducted by||Business or Profession Is Giving Benefits or Perquisites.|
|To be deducted on||Any Benefits and Perquisites.|
|Type of Benefits and Perquisites||In Cash or In-Kind or Partially in Cash and Partially in Kind.|
|No TDS||If the aggregate value would not be more than Rs 20,000 in a fiscal year.|
|Not applicable to individuals||If the Business turnover is not more than Rs 1 Crore.|
|If the turnover of the profession would not be more than Rs 50 lakh.|
The Purpose of Section 194R TDS.
Section 194R aims to ensure that businesses and professions accurately account for the tax implications of providing benefits or perquisites to their distributors, dealers, or channel partners. Previously, some companies claimed expenses for business promotions while offering various gifts, perks, or benefits under Section 37 of the Income-tax Act, 1961.
For instance, an electronics manufacturing company provided LCD televisions as incentives to channel partners who achieved specific revenue targets, treating these expenses as deductions and claiming Income Tax benefits.
However, since these incentives were provided in kind rather than cash, the recipients did not report them as part of their income returns, resulting in incorrect particulars of income. Section 28 (iv) of the Income-tax Act, 1961 specifies that the value of any benefit or perquisite, whether convertible into money or not, arising from business or profession, should be charged as business income for the recipient.
Under the newly introduced Section 194R, if a business provides its distributors or channel partners with partial cash or in-kind perquisites or incentives, they are required to deduct Tax Deducted at Source (TDS). If the benefit is entirely in kind, the provider must pay TDS on the value of the benefit or perquisites from their own funds. This provision aims to expand the tax base and eliminate opportunities for tax evasion.
Important Clarifications in Circular No. 18 of 2022
- Depreciation on Gifted Capital Assets – If a capital asset is received as a gift and tax has been withheld under Section 194R, the recipient is eligible to claim depreciation under Section 32.
- Exemption for High Commissions or Embassies – Certain high commissions and embassies are not obligated to deduct TDS under Section 194R for the benefits or perks they offer.
- Exemption for Bonus or Right Shares – Listed companies are not required to deduct TDS under Section 194R for bonus shares or right shares issued.
- Exemption for Loan Waiver or Settlement – Section 194R does not apply to one-time loan waivers or settlements provided by specified financial institutions and banks to borrowers.
- Reimbursement of Expenses by Pure Agents – Expenses incurred by pure agents that are reimbursed by the service recipient are not considered benefits or perks under this Section. Therefore, pure agents are not required to deduct TDS under Section 194R.
Illustrating the Application of Section 194R TDS.
Consider the example of a medical professional receiving free samples from a pharmaceutical company as part of a sales promotion technique. Even though the pharmaceutical company can claim a deduction for these samples as a sales promotion expense, the medical professional must report them as benefits or perquisites, classifying them as taxable income. In this case, the pharmaceutical company is required to deduct TDS from the value of the samples provided.
Scope of Section 194R TDS.
Starting from July 1, 2022, Section 194R imposes a TDS rate of 10% on benefits or perquisites provided to resident recipients. However, this provision does not apply if the aggregate value of the benefit or perquisite remains below Rs 20,000 to a single beneficiary within a financial year.
Additionally, individuals or Hindu Undivided Families (HUFs) are not required to deduct TDS under Section 194R if their total sales do not exceed Rs 1 crore for businesses or Rs 50 lakh for professions in the immediate preceding financial year.
Section 194R: Relationship with Business or Profession.
Under Section 194R, any individual providing benefits or perquisites, whether convertible into money or not, arising from business or the exercise of a profession to a resident, must ensure that tax has been deducted before providing such benefits. In essence, this provision applies to any resident providing benefits or perquisites, either cash or kind, arising from business promotions to another resident.
In conclusion, Section 194R is vital in ensuring the accurate taxation of benefits and perquisites provided within businesses or professions. By incorporating this provision, the Finance Act, 2022 aims to plug potential tax revenue leakages, enhance tax compliance, and create a fairer taxation system for all parties involved.
How to Claim 194R TDS In ITR.
Whether the Tax is born by Deductor, the deductee still claims the TDS credit appearing in 26AS. Since the TDS was born by Deductor, such TDS amount will be considered as Income u/s 5 while filling their ITR, due to grossing up of Income by TDS amount.
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