Analysis of Circular No. 12 of 2022 with regard to TDS on benefit or perquisite to a resident

 

VIL Editorial

The Budget 2022 brought in a new section, 194R in the I-T Act which requires deduction of tax at source at the rate of 10 per cent, by any person, providing any benefit or perquisite, exceeding Rs 20,000 in a year to a resident, arising from the business or profession of such resident. This section will be effective from 1st July, 2022. As promised, the finance ministry has come up with the clarifications with regard to this section before 1st July, 2022.

 

The Joint Secretary in the finance ministry, Mr. Kamlesh C Varshney while interacting with the members of industry chamber Assocham had said that "This (benefits and perquisites) is one area where nobody was paying taxes despite receiving benefits and perquisites in the course of business and profession. There is definitely a leakage here and therefore this section 194R”.

 

It is clarified that the benefit or perquisite may or may not be convertible into money but should arise either from carrying out of business, or from exercising a profession, by such resident. It is further clarified that for the purpose of calculating the aggregate of value of such benefit or perquisite the period from 1st April 2022 has to be considered, since the threshold of twenty thousand rupees is with respect to the financial year.

 

This section would put lot of restrictions on the industry. They will not be able to distribute gifts to their clients freely as they used to do before. If the businesses continue to do so they will be treated as ‘assessee in default’ and they will land up paying TDS from their pocket along with interest.

 

Let us understand who is responsible for tax deduction U/s 194R:

 

Except for the following assessees all other assessees are liable to deduct TDS U/s 194R of the Act:

 

1.   Individual/Hindu undivided family (HUF) deductor, whose total sales / gross receipts / gross turnover from business does not exceed one crore rupees,

2.   Individual/Hindu undivided family (HUF) deductor, whose total sales / gross receipts / gross turnover from profession does not exceed fifty lakh rupees,

 

during the financial year immediately preceding the financial year in which such benefit or perquisite is provided by him/it.

 

It is further clarified that the deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient as income from business or profession. Even if the amount is not taxable in the hands of recipient the TDS has to be deducted. The TDS has to be deducted irrespective of whether the benefit or perquisite is in cash or in kind or partly in cash or partly in kind. The assessees would face difficulty, either when the perquisite in given in kind or when the cash portion is not sufficient to cover the TDS amount. In such cases the deductor has either to collect the cash from the recipient or ask the recipient to pay the advance tax equal to the TDS amount and submit the challan to the deductor.

 

The TDS has to be deducted even when the benefit or perquisite is in the form of capital asset. Here the bankers will have keep in mind that the amount representing principal loan waived by bank under one time settlement scheme would be subject to TDS U/s 194R.

 

In case of sellers the following items are not subject to TDS U/s 194R:

 

a.   Sales discounts

b.   cash discount

c.    rebates allowed

d.   free items offered with purchase

 

In case of sellers the following items are subject to TDS U/s 194R (the list is not exhaustive):

 

a.   free samples

b.   When a person gives incentives (other than discount, rebate) in the form of cash or kind such as car, TV, computers, gold coin, mobile phone etc.

c.    When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets

d.   When a person provides free ticket for an event

e.   When a person gives medicine samples free to medical practitioners

 

In case the benefits/perquisites are given to owner/director/employee of the recipient entity or their relatives, the TDS has to be deducted in the name of recipient entity. In such case the threshold of twenty thousand rupees in the second proviso to sub-section (1) of section 194R of the Act is required to be seen with respect to the recipient entity and not recipient of benefits/perquisites.

 

In case of reimbursement of out of pocket expense;

 

1.   If the invoice for expenses is obtained in the name of service recipient - No TDS needs to be deducted.

2.   If the invoice for expenses is obtained in the name of service provider - TDS needs to be deducted.

 

Dealer Conferences:

In case of dealer conferences the provisions are very complicated, since TDS has to be deducted for such conferences if they are in the nature of incentives/benefits to select dealers/customers who have achieved particular targets. Also the object of the conference must be to educate dealers/customers about (i) new product being launched (ii) discussion as to how the product is better than others (iii) obtaining orders from dealers/customers (iv) teaching sales techniques to dealers/customers (v) addressing queries of the dealers/customers (vi) reconciliation of accounts with dealers/customers. For all other conferences the TDS provisions will apply. The provisions are further complicated by stating that the TDS provisions will apply if expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/business conference, expenditure incurred for family members accompanying the person attending dealer/business Conference, expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such conference. This will make things very difficult for the companies who conduct the conferences and will also increase litigation.

 

Benefit or perquisite is provided to a doctor who is working as a consultant in the hospital:

It is further clarified that if the benefit or perquisite is provided to a doctor who is working as a consultant in the hospital. In this case the benefit or perquisite provider may deduct tax with hospital as recipient and then hospital may again deduct tax for providing the same benefit or perquisite to the consultant. As an alternative, the original benefit or perquisite provider may directly deduct tax in the case of the consultant as a recipient. In case of social media influencer, if the product given for promotion is retained by them then it will be in the nature of benefit/perquisite.

 

The provision of section 194R of the Act shall not apply if the benefit or perquisite is being provided to a Government entity not carrying on business or profession (for e.g. Government hospital).

 

Valuation of perquisite or benefit:

The valuation of perquisite or benefit has to be done as under-

 *(GST will not be included for the purposes of valuation)

 

Although this section is introduced to stop leakage of revenue on the contrary, businesses will face lot of difficulty and increase litigation.

 

[Date: 17/06/2022]

 

(The views expressed in this article are strictly for information purpose.)