[The Viewpoint] Overview of the guidelines for tax deductions on benefits or perquisites

The Finance Act, 2022 introduced a new Section 194R under the Income Tax Act, 1961. The new section mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct at source 10% of the value or aggregate value of such benefit or perquisite, before providing such benefit or perquisite.

The proposal to insert Section 194R to the Act was done in order to widen and strengthen the tax base. Before the introduction of Section 194R, according to clause (iv) of Section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, had to be included in the taxpayer's total income and taxed under the head 'profits and gains from business or profession'. However, in many cases, such taxpayer did not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income. Section 194R has been introduced to eliminate such discrepancies.

The Central Board of Direct Taxes (CBDT) issued a set of detailed guidelines for removing difficulties concerning deduction of tax at source (TDS) as per the provisions of Section 194R of the Act. The Guidelines, which came into effect on July 1, 2022, are likely to affect professionals such as doctors, consultants and social media influencers, among others.

Applicability of the obligations under Section 194R

The provisions of Section 194R are not applicable if:

1. The value or aggregate value of the perquisite paid or likely to be paid to an Indian resident during the financial year does not exceed twenty thousand rupees; and

2. The benefit provider is an individual or Hindu Undivided Family, whose total sales, gross receipts, or turnover from business does not exceed one crore rupees or from profession does not exceed fifty lakh rupees, during the financial year immediately preceding the financial year in which such perquisite is provided.

Taxability and valuation of perquisites

The person responsible for providing any amount of such perquisite has no further requirement to check or ascertain whether the amount is taxable in the hands of the recipient or under which Section it is taxable before deducting a TDS at the rate of 10%. Additionally, even where the benefit given is a capital asset like a car, land etc, tax under Section 194R is held to be deductible.

Section 194R requires deduction of tax regardless of the nature of benefit provided, whether such benefit is in cash or in kind. In this regard, the first proviso to sub-section (1) of Section 194R sets out that if the perquisite is wholly in kind or partly in cash and partly in kind, and the cash component is less than the amount required to be deducted, the person responsible for providing the perquisite must ensure that tax has been paid in respect of the perquisite prior to releasing such perquisite. The valuation of all perquisites received partly or wholly in kind would be based on a fair market value, except when the benefit provider has purchased or manufactured the perquisites. In that case, the purchase price or the price that is charged to customers will be taken as the value of perquisite.

Applicability of Section 194R on discounts and rebates

The Guidelines have provided a breather for benefits like sales discounts, cash discounts or rebates allowed to customers. The CBDT, by observing such relaxation, has removed difficulties for the seller and clarified that no tax is required to be deducted under Section 194R on such discounts or rebates allowed to customers. But the relaxation will not apply to free samples being distributed such as free medicine samples given to doctors, free tickets for events, free trips, etc.

Tax deduction in the name of the recipient

It is further clarified through the Guidelines that the tax is required to be deducted in the name of recipient, regardless of whether or not such benefits or perquisites are being used by the relatives, owners or employees of the recipient. It is because the usage of these perquisites by any relative/owner/employee in their individual capacity is by virtue of their relationship with the recipient entity.

For instance, free medicine samples may be provided by a company to a doctor who is an employee of a hospital. The TDS under Section 194R of the Act is required to be deducted by the company in the hands of the hospital as benefit is provided to the doctor on account of him being the employee of the hospital. The hospital can get credit of tax deducted by furnishing its tax return.

Tax deduction for consultants and social media influencers

The tax deduction is also applicable if the perquisite is provided to a person who is working as a consultant. The Guidelines further clarify that any reimbursement of the consultant's out-of-pocket expenditure by the service provider will also fall under the ambit of perquisites. But if invoices for such expenditure are raised in the name of the service provider, then it will not be counted as a perquisite or benefit provided to the consultant.

It is more often seen that social media influencers are given products by manufacturing companies to promote them through digital platforms like Instagram, Twitter, YouTube etc. Any such benefit like mobile, outfit, car, cosmetic etc will be in the nature of perquisites and taxes have to be deducted accordingly under Section 194R of the Act. However, if such products are returned to the manufacturing company, then it will not be treated as a benefit or perquisite.

Conclusion

Lastly, the Guidelines clarify that for the financial year 2022-23, the provision of Section 194R shall apply on perquisites provided on or after July 1, 2022. All benefits provided before June 30, 2022 would not be subjected to tax deduction under Section 194R of the Act. These provisions have been brought into place with an intention and effort to close the gap on any untaxed perquisites, but at the same time, the detailed provisions of Section 194R may predominantly deter providers from offering perks and benefits to a substantial extent.