Section 194R, which deals with the tax deduction on advantages or perks related to enterprises or professions, was created by the Finance Act of 2022.
Companies, corporations, or entities frequently provide a variety of advantages and perks to its distributors, channel partners, agents, or dealers in order to encourage and inspire them to support the expansion of a firm. Travel packages, gift cards or vouchers, merchandise sold as part of incentive programs, and the use of company property are a few examples.
Why Section 194R Is Used?
The aim of the recently introduced Section 194R is to prevent potential tax revenue leakages, often known as tax evasion, in enterprises and professions. A few businesses used Section 37 of the Income-tax Act, 1961 to claim business promotion expenses while providing gifts, perks, perquisites, or benefits to their distributors, dealers, or channel partners (upon fulfillment of agreement conditions or in accordance with customs/dominant practices followed by the business entity over the years).
An electronics manufacturer, for example, offered incentives such as LCD televisions to its channel partners when they met a specific revenue target. The business claimed an income tax benefit and reported these as expenses in its profit and loss statement.
Since this specific incentive is in-kind rather than monetary, the recipients do not include it on their income tax return. As a result, inaccurate income information is provided. Under the Income-tax Act of 1961 (ITA), such an incentive or benefit in kind ought to be declared as income.
According to Section 28(iv) of the ITA, every benefit or perquisite derived from a business or occupation, whether or not it is convertible into cash, must be recorded by the person who receives it as business income.
According to Section 194R, companies must deduct a TDS if they provide any such perks or incentives to their distributors or channel partners, whether in the form of cash or in-kind. If the perquisite or benefit is entirely in kind, the person giving it must pay TDS on the full amount of the benefit or perquisite out of his own pocket.
Thus, expanding the revenue base and closing any loopholes for tax evasion are the goals of Section 194R.
To give another example, free samples must be declared as income and claimed as a benefit or perquisite if a medical professional receives them. This is true even if the pharmaceutical corporation is utilizing it as a tactic for promoting sales. For such a sales effort, the pharmaceutical company is eligible to deduct costs. However, the promotion would be taxable income in the recipient’s eyes, and the pharmaceutical company would have to deduct TDS from that amount.
Scope of Section 194R
The 10% TDS that will be imposed under Section 194R will take effect on July 1, 2022. It only applies to residents who receive advantages or privileges as receivers of a benefit.
Section 194R, however, does not apply to a beneficiary if the total value of benefits or prerequisites for such beneficiary for the financial year (FY) does not exceed Rs 20,000.
Additionally, when total sales in the immediately previous financial year did not exceed Rs 50 lakh in the case of a profession or Rs 1 crore in the case of a business, an individual or Hindu Undivided Family (HUF) is not required to deduct TDS.
Section 194R: Establishing a Connection with Business or Profession
Before giving a resident any advantage or perquisite, as the case may be, resulting from their commercial or professional activities, regardless of whether it is convertible into cash or not, the individual must make sure that taxes have been withheld.
To put it plainly, any resident who gives another resident any benefit or perquisite is subject to the TDS under Section 194R. The benefit may result from business promotions and must be monetary or in kind.
Applicability of Section 194R
This clause applies to any firm, company, or professional that provides a person receiving more than Rs. 20,000 in benefits, gifts, incentives, or other non-monetary benefits in cash, kind, or partially in cash and kind throughout the financial year.
To whom should Section 194R TDS be deducted?
A firm, company, or professional is required by Section 194R to deduct TDS when it provides benefits or privileges to an agent, dealer, channel partner, distributor, or any other individual during the fiscal year.
TDS non-applicability in accordance with Section 194R
- Section 194R does not apply to employees who receive benefits from their employers. Section 192 will apply to them.
- When the recipient is a non-resident, the tax will be deducted under Section 195.
- When there is no business relationship, this section will not apply.
How does Section 194R apply to TDS deductions?
When providing perks or privileges, the corporation, firm, or professional should deduct and pay TDS before granting such benefits.
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TDS certificate
A quarterly TDS certificate in Form 16A will be provided to the deductee by the deductor. Form 16A can be downloaded by the deductor from the TRACES account, and it can be viewed by the deductee in their 26AS. If a deductor is required to deduct tax under Section 194R, they must submit Form 26Q quarterly returns.