Analysis of new Inserted Tax Deducted at Source (TDS) provision (Section194R)

28th February, 2023 - 7:28 am Categories: TAX 0 Comments

Introduction

To ease the burden of the assesses (general public who are taxpayers) to pay the tax on due date at the end of the financial year the Central Board of Direct Taxes (CBDT) deducts the tax at source on the due income before being credited to the general public. In this case, deduction is done by the payer who is called as “deductor” and the general public is called as “deductee” making tax returns easily accessible at the time of tax return filing. However, it wasn’t much effective in such transaction for getting benefit or perquisite arising from business or profession such as doctors receiving free samples of medicines, social media influencer receiving any free products to promote the same or a manufacturer giving gifts to seller or distributor on accomplishing any target. To plug the tax evasion in such types of transactions section 194R has been inserted under the Income Tax Act, 1961 to track the benefit or perquisite in the form of cash or kind falling within the scope of section 28(iv) of the Act. The rate of deduction is 10% and threshold of Rs 20,000 has to be for deductee.

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Valuation and Threshold

According to CBDT the basis for the valuation of the benefit or perquisite will be fair market value except in the following cases-

• In case where the benefit or perquisite provider has purchased the same before giving it to the recipient, value for the benefit of perquisite will be purchasing price.
• In case where the benefit or perquisite provider is the manufacturer, value for the same will be the price at which it is given to customers.

GST will not be calculated for valuation of benefit or perquisite for TDS u/s 194R.

Now, if the value or aggregate value after doing valuation of the provided benefit or perquisite exceeds Rs. 20,000 during a financial year, deduction of tax will be on entire value and not merely the excess of 20,000.

Liability of the Deductor on how to make tax deduction

The person in charge for giving a benefit or perquisite to a recipient must ensure that tax has been deducted and paid for the benefit and perquisite, and that the tax necessary to be deducted has been paid by the beneficiary:

• “deductor” by paying from his pocket or by grossing up.
• “deductee” gives cash to the deductor to pay the tax required to be deducted.
• Deduction in the amount of TDS to the account of the payee.
• Tax paid by payee himself in the form of advance tax and gives challan to the payer.

In the last case, CBDT clearly states the number of challans and copy of the payment of advance tax will be required to be reported in the TDS return.

Applicability of the Provision

• It is only applicable to residents getting benefits or perquisite arising from business or the profession by such resident. For example-
• If a medical shop provides sample of medicines to the doctor of a particular hospital, the tax will be deducted for that benefit or perquisite.
• When an employer pays for a trip for a worker when they reach a particular goal.
• When someone offers incentives in exchange for goods or services like a car, TV, laptop, expensive mobile phone, etc.
• In the scope of Section, 194R brings all the situations where benefit or perquisite is swholly in cash or partly in cash or wholly in kind or partly in kind.
• The benefit and perquisite shall be taxable even if their nature is the capital asset in general sense like car, land, etc. but for the recipient, it is benefit or perquisite, hence Section 194R will apply to the same. For example- where a social media influencer has been given a car by the company “X” for which the influencer promotes their Cars, the value of car will be beneficial and taxable.

Non- applicability of the Provision

Situations exempted under this provision:

• If the value or aggregate value of the benefit or perquisite is less than 20,000 during the financial year.
• If a provider is a specified individual or HUF whose total sales or turnover is less than Rs. 1 crore in case of business and 50 lakhs for profession.
• If the provider and beneficiary are in a relationship of worker and employer.
• If the incentive and acquisition are unrelated to the same provider resident’s work or profession.
• If benefit or perquisite is given to a customer who doesn’t exercise any business and profession.
• If a benefit or perk is permitted, it may take the form of a sale discount, a cash discount, or a refund to customers by seller.

Core issues involved

This provision covers the benefit and perquisite covered u/s 28(iv) of the act, which says, the benefit received has to be in kind and not monetary, held by the Hon’ble Supreme court in case of Mahindra & Mahindra Ltd. However, this provision intends to cover monitory benefits.

The provision states that valuation of the benefit or perquisite will be based on fair market value. However, the term fair market value has nowhere defined.

This provision contains various types of difficult transactions which will impose serious challenges on deductors.

Expenditure of the family of the person travelling for business purposes is not covered under perquisite held in the case of David Dhawan [2005]. However, section 194r covers this as perquisite.

This provision states nexus in business must be there which means only applicable to resident in business or profession by such resident. B2C benefits or perquisite are not covered under this provision.

In case of non-residence benefit or perquisite recipient, no TDS is applicable which will make TDS return bulkier.

Conclusion

From the above article, Section194R is an extensive provision that talks about varied nature of transactions which are difficult to define. It will be quite compelling to watch how the Government will make various rules for this provision. Seeing the wide scope of this provision one thing is certain it will cover more transactions under benefit and perquisite in coming years. On one hand, this provision has increased the burden of the provider of benefit or perquisite. But on the other hand, it makes sure that every benefit or perquisite is tracked and plugs tax evasion in the country.

Author: Kajal Kumari, a final year law student from Bharati Vidyapeeth Deemed University, New Law College, Pune, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

References

https://taxguru.in/income-tax/tds-provisions-section-194r-194s-applicable-01-07-2022.html

https://www.financialexpress.com/money/income-tax/tds-rule-for-social-media-influencers-under-section-194r-2022-explained/2577751/

https://www.taxmann.com/post/blog/faqs-section-194r-of-the-income-tax-act-tds-on-benefit-or-perquisite/?amp

https://indianexpress.com/article/business/capital-assets-given-benefits-under-section-194r-scope-8001967/