Understanding Section 194R of the Income Tax Act: Purpose, Applicability, and TDS Deduction
Purpose of Section 194R
Section 194R was introduced primarily to curb tax revenue leakages and enhance compliance among businesses and professionals. Previously, many companies claimed tax deductions for promotional expenses related to gifts, perks, or benefits given to distributors, dealers, or channel partners. However, these benefits, often provided in kind, frequently went unreported by recipients, leading to discrepancies in income declarations.
Example Scenario
Consider an electronics company that rewards its channel partners with LCD televisions for achieving sales targets. While the company claims these expenses for tax purposes, the channel partners may not report the value of these televisions as income, creating a gap in the tax system. Section 194R aims to address such situations by mandating TDS deductions on these benefits.
Scope of Section 194R
TDS Rate and Applicability
The TDS rate under Section 194R is set at 10% and became effective from July 1, 2022. This provision applies solely to resident recipients of benefits or perquisites.
Key Points of Applicability:
– The section applies when the value of benefits or perquisites provided exceeds ₹20,000 in a financial year.
– It is not applicable to individuals or Hindu Undivided Families (HUFs) whose total sales in the preceding financial year were below ₹1 crore for business or ₹50 lakh for professional income.
– TDS under Section 194R is applicable regardless of whether the benefit is in cash, kind, or a combination of both.
Nexus with Business or Profession
Under Section 194R, any individual providing benefits to a resident—whether in cash or kind—must ensure that tax is deducted before delivering such benefits. This means that businesses must be vigilant in their dealings with agents, distributors, or any third parties receiving these perks.
Who Should Deduct TDS Under Section 194R?
Businesses, companies, and professionals that provide benefits or perquisites to agents, dealers, channel partners, or distributors are liable to deduct TDS under Section 194R. This includes both monetary and non-monetary benefits.
Non-Applicability of TDS Under Section 194R
It is important to note that certain situations exempt entities from TDS deductions under this section:
1. Employee Benefits: TDS under Section 192 applies to employee benefits, not Section 194R.
2. Non-Residents: If the recipient is a non-resident, Section 195 applies for TDS deductions.
3. No Business Relationship: TDS will not apply where there is no business connection.
4. Threshold Limit: If the total value of benefits does not exceed ₹20,000, TDS is not required.
5. Small Businesses: Individuals and HUFs with income below specified thresholds are exempt.
How to Deduct TDS Under Section 194R
TDS must be deducted by the entity providing the benefits before the benefits are handed over. The deducted TDS needs to be paid by the 7th of the succeeding month.
Challenges in Non-Monetary Transactions
A common question arises: how do you deduct TDS on benefits provided in kind? Here are some methods:
1. Grossing Up: If a business gives a benefit valued at ₹1,00,000, it can gross up the value for TDS calculations. The grossed-up value would be ₹1,11,111, leading to a TDS deduction of ₹11,111, which the company pays from its own funds.
Example: A company provides mobile phones worth ₹1,00,000. To cover TDS, the company can gross up to ₹1,11,111 and pay ₹11,111 in TDS from its own account.
2. Cash Reimbursement: The company can ask the recipient to reimburse a cash component to cover the TDS.
3. Adjusting Balances: If the beneficiary has a credit balance with the company, that amount can be adjusted against the TDS liability.
Calculating the Value of Benefits
The Central Board of Direct Taxes (CBDT) has clarified how to assess the value of benefits under Section 194R. Generally, the value will be the fair market value of the benefits unless specified otherwise:
1. Purchase Price: If the benefit provider has incurred a cost for the benefit, the purchase price applies.
2. Manufacturers: For manufacturers, the price charged to customers is used to determine the value of benefits.
TDS Certificates and Compliance
After deducting TDS, the deductor must issue a quarterly TDS certificate in Form 16A to the deductee. This form can be downloaded from the TRACES account, and deductees can view it in their Form 26AS. Additionally, quarterly returns must be filed in Form 26Q.
Conclusion
Section 194R of the Income Tax Act represents a significant step towards enhancing tax compliance and closing avenues for tax evasion related to non-monetary benefits. Businesses and professionals must ensure they are fully aware of their obligations under this section to avoid penalties and contribute to a fair tax system. By understanding the nuances of TDS deductions under Section 194R, entities can effectively navigate the complexities of tax compliance while optimizing their promotional strategies.
