TDS on benefit or perquisite under section 194R in Income Tax Act

Budget 2022 has introduced a new section for tax deduction at source (TDS) – section 194R of the Income-tax Act, 1961.

This section is applicable with effect from 1 July 2022.

To further clarify the scope of the section, the Circular 12 of 2022 was issued by the Central Board of Direct Taxes. Guidelines in QnA format have been released in this Circular. However, it is important to note that as per law, a Circular is not binding on the taxpayers and is only binding on the Income tax department officials.

With that said, let us discuss what the section says:

Section 194R states that TDS is to be withheld at 10% if specified person (deductor) provides any “benefit or perquisite” to an Indian resident exceeding Rs 20,000 in a financial year.

The limit of Rs 20,000 is to be calculated for each recipient in a financial year.

Specified persons mean:

1. Individual/ HUF having turnover exceeding Rs 1 crore or professional receipts exceeding Rs 50 lakhs in the immediately preceding year (i.e. FY 2021-22)

2. Partnership firms, companies and all other assessees (irrespective of turnover)

What is “benefit or perquisite”?

The terms have wide connotation. The intent of introduction of this section was to tax free samples given by businesses (especially pharma companies and hospitals giving free samples to doctors).

However, based on the language of the law and the Circular issued by the Income Tax Department, any type of benefit or perquisite given to an Indian resident will get covered.

Common examples include:

1. Free samples given to medical practitioners

2. Sponsoring trip for any client/ vendors and their relatives

3. Providing free tickets to client/ vendors for movies, sports, other events etc

4. Any incentives given in form of cash, gold, mobile phone, TV, computers, etc.

5. Free samples of products given to social media influencers on a non-returnable basis

6. Expenditure incurred on travel of consultants/ auditors where the invoice is not in the name of the company.

Dealer conferences are not in the scope of this section where the prime object of the conference is to educate the dealers about new products, address queries, sales discussions or reconcile accounts. However, two conditions are required to be fulfilled:

1. Conference must not be for selected dealers or customers who have achieved specified targets

2. Expenditure incurred for dealer’s family members or any leisure trip incidental to the conference will be considered as benefit or perquisite for section 194R.

If it is given in kind, then the valuation will be the market value of the benefit or perquisite (excluding GST).

If benefit given to a person in his capacity as employee of a company, TDS is to be withheld in the name of the employer company. If the benefit is given to a consultant of a company (i.e. not on payroll), TDS is to be withheld in the name of the recipient (i.e. consultant).

Conclusion

To conclude, the new provisions are going to come into force from 1 July 2022. Every benefit given to a third party should be monitored and extensive documentation is to be maintained for the same.

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