What is Section 194R of Income Tax Act 1961?
Section 194R of the Income Tax Act of 1961, is a provision that deals with the taxation of benefits and perquisites provided by businesses or professionals to individuals. This section mandates that any person providing benefits or perquisites to a resident individual exceeding Rs. 20,000 in a financial year must deduct Tax Deducted at Source (TDS) at a rate of 10%.
This section applies to various scenarios, including gifts, perquisites, incentives, rewards, sponsored trips, expenses, and complimentary services or products. The fair market value (FMV) of the benefit or perquisite determines the taxable value. TDS must be deducted when providing the benefit or perquisite, and the person deducting TDS must file a quarterly TDS return in Form 26Q.
The person responsible for providing the benefit or perquisite is liable for deducting TDS under Section 194R. This includes businesses, professionals, companies, and individuals.
Who is Responsible for Deducting TDS Under Section 194R?
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.
Why Section 194R is introduced?
Section 194R was introduced to close loopholes that businesses and professionals were taking advantage of. Instances had arisen where certain companies claimed expenses under Section 37 of the Income Tax Act for business promotions while also 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.
Applicability of Section 194R
- TDS is applicable to any resident providing a benefit or perquisite to another resident.
- The benefit or perquisite must be in kind and arising from Business & Profession.
- TDS is to be deducted at a rate of 10% on the value or aggregate value of the said benefit or perquisite.
- TDS must be deducted before providing the benefit or perquisite.
- TDS is applicable even when cash is insufficient for payment of the same.
- No TDS is applicable if the benefit or perquisite per person does not exceed Rs. 20,000 in a financial year.
- No TDS is applicable when the deductor is an Individual or HUF and business/profession with turnover or receipts below Rs. 1 crore or Rs. 50 lakhs, respectively.
When is Section 194R not Applicable?
- Section 194R does not apply to the employees who receive benefits from the employers. Such employees are subject to the provisions of section 192 instead of section 194R.
- If the recipient is a non-resident, then the tax is deducted under section 195.
- This section does not apply if there exists no business relationship between the employer and the employee.
Section 194R: Association of Business or Profession with Perquisite
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.
- No Transfer or Disposal for Consideration: These items are not transferred or disposed of to a third party for any monetary or other valuable consideration.
- Not Business Assets: These items are not acquired for the purpose of generating future economic benefits or for use in the business.
- Not Gifts: The expenditure incurred on these items is not a voluntary act of generosity. It is a necessary business expense aimed at promoting sales and generating demand in the market.
- Moveable Property for Distribution: At best, these items can be categorized as moveable property intended for distribution to promote business.
- Business Expenditure: The expenditure incurred on these items is a legitimate business expense, similar to other expenditures made to further the business objectives.
As a result, these items are not considered outward supplies and are not subject to GST.
TDS Certificate Under Section 194R?
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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