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The digital media landscape has transformed the way marketing and brand promotion work. Companies no longer depend only on conventional advertising methods to connect with their potential customers. Instead, they have adopted a new approach, where they partner with social media influencers who have a large fan following base. This mutually beneficial arrangement, which often involves influencers getting free products and other incentives from companies, has attracted the attention of tax authorities due to the implementation of Section 194R, also known as TDS on Business Promotion.
This new clause under the Income Tax Act requires the deduction of tax at source on any payment made to an influencer or a person involved in the promotion of a business. As a result, the issuance of freebies or other non-monetary benefits to influencers now falls within the purview of taxable transactions, potentially leading to a reexamination of the overall business promotion practices.
Section 194R of the Income Tax Act, 1961, emerges as a fresh provision under the Finance Act, 2022, ushering in its operational domain from the 1st of July, 2022. This particular section mandates any entity extending benefits or perquisites to a resident, as a byproduct of their business or professional pursuits, to undertake TDS (Tax Deduction at Source) at the rate of 10% of the value or cumulative value of said benefits or perquisites. Notably, such benefits or perquisites may assume the form of monetary or non-monetary assets, with or without the possibility of being converted into currency.
However, an important threshold lies within this provision. A tax deduction is not allowed if the value or aggregate value of the benefit or perquisite remains below Rs. 20,000 within a single financial year.
Under Section 194R of the Income Tax Act, the responsibility to deduct Tax Deducted at Source (TDS) falls upon the business, company, or professional that provides benefits or perquisites to an agent, dealer, channel partner, distributor, or any other person within the scope of the said section during the financial year. This provision, established by the Indian income tax laws, aims to regulate the taxation process concerning commission or remuneration received by these beneficiaries. Notably, the burden of the TDS deduction does not rest on the recipient of the benefits but rather on the entity providing the perks.
The introduction of the new Section 194R within the Income Tax Act serves a pivotal role in curbing potential tax leakages within businesses and professions. Instances had arisen where certain companies claimed expenses under Section 37 of the Income Tax Act for business promotions while concurrently providing various gifts, perks, or benefits to their distributors, dealers, or channel partners. These benefits were often presented in compliance with agreements or customary business practices, with the company incurring Income Tax benefits based on these expenses.
For example, a restaurant provides dinner reservations to a social media influencer to review them. The restaurant would then record these expenditures in its profit and loss account, subsequently seeking an Income Tax advantage. However, the beneficiaries of such benefits often fail to report them in their income tax returns, as they are in the form of non-cash benefits, leading to the submission of inaccurate income particulars.
To address these concerns, Section 194R necessitates the deduction of TDS by businesses providing such benefits to distributors or channel partners, either in cash or in kind. If the benefit is entirely non-monetary, the provider must ensure TDS payment from their own resources. This section aims to broaden the tax base and eliminate potential tax evasion, ensuring that any benefits or perquisites received, regardless of their convertibility into cash, are disclosed and subjected to appropriate taxation.
Under the guidelines of Section 194R, any individual providing a benefit or perquisite to a resident must ensure the deduction of tax before delivering the said benefit or perquisite. Simply put, this section mandates that TDS is applicable to any resident offering benefits or perks, whether in cash or kind, come out from business activities or professional engagements.
The deductor has to issue a quarterly TDS certificate to the deductee through Form 16A. The deductor can also download Form 16A from the TRACES website, which can be viewed by the deductee in their 26AS. The deductor who is liable to deduct tax under section 194R has to file quarterly returns in form 26Q.
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This provision applies to any resident individual providing benefits or perquisites to another resident arising from business or professional activities.
TDS is applicable to both monetary and non-monetary benefits provided as part of business promotion activities.
No TDS is required if the value of benefits or perquisites provided does not exceed Rs. 20,000 in a financial year.
Yes, individuals and Hindu Undivided Families (HUFs) with business turnover or receipts below Rs. 1 crore or Rs. 50 lakhs, respectively, are exempt from this provision.
TDS should be deducted before providing the benefits or perquisites to the recipient.
The TDS rate is set at 10% of the value or aggregate value of the perquisite and benefit provided.
Businesses are required to accurately report and maintain records of TDS deductions made under Section 194R for compliance purposes.
