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.