All About TDS Under Section 194R of the Income Tax Act

Section 194R

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.

Purpose of Introducing Section 194R

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.

Example of TDS Under Section 194R

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.

Applicability 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.

Scope of Section 194R

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.

Who shall 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.

How to Deduct TDS From Benefits or Perquisites?

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.

Any of the following options can be used to discharge the liability:

• Either the payer will gross up the net amount or he will pay the tax out of his pocket.
• If the payee pays the payer cash in order to satisfy the TDS obligation and the deductor deposits that cash.
• The payer may deduct TDS from any credit balance the payee may have and then pay the net amount after the payee has been charged TDS.
• If the benefits or business perks are in kind, then the person makes sure to take necessary action in TDS compliance, before releasing such benefits or perquisites.

Meaning of Specified Benefit/ Perquisite

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.

• It refers to any perk or benefit
• It may be converted into cash or not
• Benefits or perks may come in the form of money, things in kind, or a combination of both.
• It must result from the specified deductee's (resident recipient satisfying certain conditions) conduct of business or professional activity
• The value of any such benefit, perk, or the total value of all such benefits and perks provided during the financial year should not be greater than Rs. 20,000.

Exemption From Section 194R

In the following cases, no deduction of TDS under Section 194R is required.

• If an employer-employee relationship exists, then it will be handled in accordance with Section 192, so this section does not apply to employees who receive benefits from their employers.
• If the recipient is a non-resident, the tax must be withheld in accordance with Section 195.
• No tax deduction will be made if there is no business relationship.

Section 194R: Nexus With Business or Profession

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.

Some Important CBDT Clarifications With Regard to the Applicability of Section 194R

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 deductor is not required to determine whether the applicable benefit or perquisite is taxable in the deductee's hands under section 28(iv) of the Income Tax Act when deducting TDS in accordance with Section 194R.
• TDS under Section 194R is deductible regardless of the type of benefit or perk (i.e., capital or revenue).
• Whether a benefit or perquisite is given entirely in cash, entirely in kind, or partially in cash and partially in kind, 
• TDS under Section 194R is deductible.
• In the case of cash discounts, sales discounts, and rebates granted to customers, TDS pursuant to Section 194R is not required to be deducted.
• If the benefit or perk is given to a government entity (such as a government hospital that is not engaged in business or profession), TDS under Section 194R is not applicable.
• If a public financial institution, a scheduled bank, a cooperative bank, etc. waives a loan after reaching a settlement with the borrowers or settles a one-time loan with the borrowers, TDS under Section 194R is not deductible.
• It is made clear that in the case of the dealer/business conference, the day immediately preceding the start date and the day immediately following the end date will not be regarded as overstays.
• It is clear that if a benefit or perk is difficult to distribute to each participant in a group activity, it will not be provided. Then, at his discretion, the provider may decide not to include those costs when determining his overall income. The provider is not required to deduct TDS under Section 194R if he chooses not to claim the benefit or perquisite expense.

TDS provisions under Section 194R do not apply to benefits or perks given by

• A group covered by the United Nations Privileges and Immunity Act 1947.
• An embassy, a high commission, a commission, a legation, a trade representation, and a consulate are examples of foreign state entities whose income is exempt from taxation under a specific Act of Parliament.

Compliance Requirements for Businesses Under Section 194R:

• Identify the benefits or perquisites that are subject to TDS. This includes any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.
• Determine the value of the benefit or perquisite. The value of the benefit or perquisite will depend on the nature of the benefit. For example, the value of a gift may be its market value, while the value of a car may be its depreciated value.
• Deduct TDS at the rate of 10%. The TDS must be deducted before the benefit or perquisite is provided to the recipient.
• Deposit the TDS with the Income Tax Department within 30 days of the end of the month in which the TDS was deducted.

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.

Here Are Some Steps That Businesses Can Take To Comply With Section 194R:

• Keep good records of all benefits and perquisites provided to employees and other third parties. This will help the business to determine the value of the benefits and perquisites and to calculate the amount of TDS that needs to be deducted.
• Set up a system for deducting TDS and depositing it with the Income Tax Department. This system should be in place before the start of the financial year.
• Train employees on the requirements of Section 194R. This will help to ensure that employees are aware of their responsibilities and that they comply with the law.

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.

Other Considerations Need to Know for TDS Under Section 194R

Tax Rate Applicable on Section 194R

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%.

Time Of Deduction Under Section 194R

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.

Due Date of Deposit of TDS

Issue of TDS Certificate

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.

Filing of TDS Return

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.

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