Income Tax

Section 194R of the Income Tax Act- Brief Analysis

The finance bill has proposed to add Section 194R to the Income Tax Act 1961. Although this change will be effective from July 1, 2022. This section has been inserted with a view to bring into tax those benefits or perquisite that a person receives during the course of business or profession which is not disclosed in the ITR.

What does Section 194R of the Income Tax Act state?

The proposed section states that any person who is responsible to provide a resident any benefit or perquisite (whether convertible into money or not) from a business or profession, such resident has to ensure that the tax has been deducted in respect of such benefit or perquisite at the rate of 10% of the value or aggregate of value of such benefit or perquisite.

So from the above statement we know that-

• The TDS shall be applicable on a Resident who provides any benefit/perquisite to another Resident;
• The Benefit/Perquisite has to be arising from Business/Profession;
• TDS should be deducted at the rate of 10% on the value or aggregate of value of such benefit or perquisite;
• Such TDS should be deducted before such benefit or perquisite is provided.

When do the provisions of this section not apply?

The provisions of this section shall not apply in the following cases:

• Where the value of or aggregate value of the benefit or perquisite provided to the resident during the financial year doesn’t exceed 20000 rupees;
• Where a deductor is an Individual/HUF in business/profession with turnover/ gross receipts in business/profession below Rs.1Cr / Rs.50 Lakhs respectively.

What was the need for this TDS provision?

Finance Minister said that as part of the business promotion strategy, businesses tend to pass on the benefits to their agents. The benefits here are taxable hence to track such transactions, tax deduction by the person who provides such benefits has been proposed.

There have been instances where such recipient doesn’t report the receipt of benefits in their Income Tax Return. This results in incorrect submission of particulars of income. Hence Section 194R has been inserted to institute a mechanism that can capture and detect such benefits/perquisite that has been unaccounted and untaxed.

Analysis

There are various types of perquisites and benefits that are provided by businesses to their dealers, distributors, agents, channel partners etc. The idea behind providing perquisites and benefits is to incentivise and motivate them to assist in the business growth.

Some of the common types of benefits or perquisites can be-

• Travel packages;
• Gift cards/vouchers;
• Products under incentive scheme like phones, vehicles etc.

By analysing this section, it can be inferred that transactions through issuance of credit notes will not be covered under this section and that benefit or perquisite from business or profession shall only be covered.

This means that it is necessary that the benefit or perquisite is connected with the business or profession of the recipient. Hence there should be a nexus between the recipient residents’ business and the benefit extended to him.

Hence in order to comply with this provision, the following should be ensured:

• The deductor shall ensure that TDS at the rate of 10% is deducted before the benefit or perquisite is provided.
• The deductor needs to deposit the tax so deducted to the Central Government on or before 7^th day of the following month, with its TAN number.
•  The deductor would file quarterly TDS return in Form 26Q on or before the due dates mentioned in the Act.
• The deductor will also have to quarterly issue certificate of tax deducted in Form 16A to the deductees.
• TDS will not be needed if value or aggregate of value of benefit/perquisite extended or likely to be provided is up to 20000 rupees.

Ambiguities in Section 194R

There are a few queries that taxpayers^[1] have with respect to the proposed provisions. Hence these queries must be cleared at the earliest to clear all ambiguities. Some of the common queries are as follows:

• The terms perquisites/benefits have not been defined categorically to get clarity on Section 194R, which leaves these words open ended. Hence the finance ministry should clear the air about these two terms and define them categorically;
• Further, the basis on which the value of benefit/perquisite is determined has not been specified in cases where they are not convertible to money;
•  The proposed provisions of this section state that in case of non-monetary benefits or perquisites, the provider of such benefits/perquisites needs to ensure that the tax is paid beforehand on such benefit/perquisite. However, the provision is silent on how the provider can comply with this.

Conclusion

Section 194R in its present form would pose a huge compliance challenge for various businesses as there are different types of perquisites & benefits that are provided to their dealers/ distributors/agents/ channel partners etc. Additionally, this section has a few ambiguities with respect to some of its provisions, hence to solve the queries of taxpayers a detailed clarification should be issued.

Read our Article:Section 269SU of the Income Tax Act