Section 194R was introduced in the Finance Act of 2022, which deals with the tax deduction for benefits or perquisites related to businesses or professions.
Section 194R deals with the provision related to TDS on payment of business benefits or perquisites to resident individuals by businesses or professions. This section was added primarily to prevent people from underreporting income they receive from their jobs or businesses in the form of perquisites or other non-cash benefits. This section came into force on 1st July 2022.
Businesses, companies, or entities frequently offer their distributors, channel partners, agents, or dealers a variety of benefits and perquisites to encourage and motivate them to support the continued expansion of a business. Travel packages, gift certificates or cards, products offered as incentives, and the use of company assets are a few examples. There are many others.
The new TDS Section 194R was inserted with the intention to stop potential tax revenue leaks (tax evasion) in businesses and professions. A few businesses or professions used Section 37 of the Income-tax Act, to claim expenses for business promotions while providing various perks, perquisites, gifts, or benefits to their distributors, dealers, or channel partners (upon fulfilment of agreement conditions or in accordance with prevalent norms/ traditional practice followed over the years by the business entity).
As per sub-section (iv) of section 28 of the Income Tax Act, any benefit or perk (whether convertible into money or not) received from a business or profession, must be reported as business income in the hands of the recipient.
For instance, a manufacturer of electronic products offered LCD televisions as rewards to channel partners who met a specific revenue goal. Such business perks were accounted for as business expenses in the company's profit and loss statement, and an income tax benefit in terms of expenses was claimed.
Due to the fact that this particular incentive is in-kind and not monetary, the recipients do not disclose it on their income tax returns. As a result, inaccurate income information is provided. Such a financial incentive or in-kind benefit should ideally be reported as income under the Income-tax Act, of 1961.
Now, a business or profession is required to deduct a TDS under Section 194R if it offers its distributors or channel partners any such perks or incentives, whether partially in cash or in kind. The person who is providing the benefit or perquisite should pay TDS on the value of such benefit or perquisites out of his own pocket if the benefit is entirely in kind. Therefore, the goal of Section 194R TDS is to increase the tax base and close any loopholes for tax evasion.
For illustration, let’s say a pharmaceutical company gives a few free samples to medical professionals or doctors. Such free samples received by medical professionals must be disclosed as a benefit or perquisite and as income in the hands of the medical professionals or doctors. The pharmaceutical company may be using it as a strategy for sales promotion and such a sales promotion, the pharmaceutical company may claim it as an expense. However, such promotion is taxable income in the hands of the receiver, and now the pharmaceutical company would need to deduct TDS at the rate of 10% because of the introduction of Section 194R.
This section applies to any resident individual who receives any gifts, perks, incentives, or other financial or non-financial benefits from a business or profession in cash or in kind or partially in cash and kind, and the value of such benefits or perquisites in monetary terms exceeds INR 20,000 during the financial year. If so, such business or profession is required to deduct TDS on it at the time of credit or at the time of payment, whichever is earlier.
Starting on July 1, 2022, TDS will be assessed at a 10% rate under Section 194R. Only residents who receive benefits or perquisites are subject to this rule. However, where the total value of benefits or prerequisites for one beneficiary during the financial year does not exceed Rs 20,000, Section 194R is not applicable.
Additionally, where total sales in the immediately prior financial year did not exceed Rs 1 crore for a business or gross receipts does not exceed Rs. 50 lakh for a profession, such as an individual or Hindu Undivided Family (HUF) is not required to deduct TDS under Section 194R.
Any business or profession that provides agents, channel partners, dealers, distributors, or any other person with benefits or perquisites worth more than the allowed amount during a financial year must deduct TDS in accordance with Section 194R.
The Individual/HUF may not, however, deduct TDS if their total sales for the immediately prior financial year did not exceed INR 50 lakh for a profession and INR 1 crore for a business.
Before releasing such benefits or perquisites, the person providing them must make sure that the tax required to be deducted is deducted and paid in respect of such items.
To trigger the liability of the deductor (benefit/perquisite provider) under Section 194R to ensure that tax has been deducted, he must have provided the specified benefit/perquisite to the specified deductee. Benefit/perquisite only qualifies as a specified benefit/perquisite if it meets the requirements listed below.
In the following cases, no deduction of TDS under Section 194R is required.
Many businesses give away free samples and rewards to their business association or channel partners as a sales promotion activity. A business or profession giving a resident a benefit or perk, whether it is convertible into money or not, as a result of their business or professional activities must first make sure that all applicable taxes have been taken out before giving them the benefit or perk, as the case may be.
Simply put, any resident who gives a benefit or perk to another resident is subject to the TDS under Section 194R. The benefit must be monetary or in kind, and it may result from business promotions.
The Central Board of Direct Taxes (CBDT) has released two circulars, number 12 of 2022 dated June 16, 2022, and number 18 of 2022 dated September 13, 2022, that address a number of issues. Here is a summary of both circulars' main points which talks about Section 194R applicability:
The consequences of non-compliance with Section 194R can be severe. The tax authorities may levy penalties and interest on the non-compliant business. In addition, the non-compliant business may be liable for criminal prosecution.
By following these steps, businesses can help to ensure that they are compliant with Section 194R and avoid the penalties and interest that may be imposed for non-compliance.
The applicable TDS rate for this section is 10%, which went into effect on July 1st, 2022.
If the value of such gifts or perquisites during each recipient's financial year exceeds INR 20,000, businesses or professionals must deduct TDS @ 10%.
TDS under Section 194R must be deducted before disbursing the benefit or perquisite. It is important to note whether the benefit or perk is entirely in kind or paid for partially in cash and partially in kind. In this situation, the deductor must make sure that the TDS related to the benefit or perquisite is paid before releasing the benefit or perquisite.
|The amount credited or payment made for the month other than March.||On or before the 7th of the subsequent month.|
|The amount credited or payment made for the month of March.||On or before the 30th of the subsequent month (Note: In case of Government Deductor, on or before the 7th of the subsequent month).|
The deductor will be required to issue a TDS certificate to the deductee in form 16A within 15 days from the due date of furnishing the TDS Return for 194R.
The deductee may claim a TDS credit in their income tax return. Additionally, Form 26AS on the income tax department website contains information about the tax deducted in accordance with Section 194R.
A business or profession that provides business perks or benefits is required to deduct TDS and submit TDS reports in accordance with Section 194R of the Income Tax Act. As a result, they must file quarterly returns on Form 26Q by the last day of the month following the quarter's end. The following are the due dates.
|From April to June||31st July|
|From July to September||31st October|
|From October to December||31st January|
|From January to March||31st May|
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