Implications Of Section 194R In The Income Tax Act

Introduction

The Finance Act, 2022 inserted a new section 194R for TDS deduction on benefit or perquisite arising from business or profession. This new provision is coming into effect from July 1, 2022. It mandates a resident person, who is responsible for providing any benefit or perquisite to deduct tax at source at the rate of 10% of the value of aggregate of value of such benefit or perquisite. The benefit or perquisite may or may not be convertible into money but should arise either for carrying out of business, or from exercising a profession, by such resident. While the understanding at the time of the passing of the Finance Act was that Section 194R would apply only to those benefits/perquisites that qualify as business income under Section 28(iv), the CBDT Circular issued on June 16, 2022, has clarified that the provider of benefits/perquisites need not check if the benefits/perquisites are taxable under Section 28(iv). Moreover, the CBDT has also issued other clarifications in this regard such as:

· Section 194R applies even if the benefits are paid in cash.

· Capital assets such as cars and land are also covered under Section 194R

· Sales and cash discounts do not fall within the purview of Section 194R

· Government entities are exempt from Section 194R

· Valuation of the benefit shall be based on fair market value of the benefit.

· Reimbursable expenses shall be counted as benefits/perquisites.

· Expenses on leisure trips or to participate in conferences would also be considered benefits/perquisites.

The new provision is set to come into effect from July 1, 2022, and there still remains confusion regarding the implications of this new section. We, through this article, have discussed at length the various implications that may arise as a result of invocation of Section 194R.

Implications of Section 194R

Following implications of Section 194R merit discussion:

· One of the first concerns that plagues Section 194R is the clarification that the taxability of the benefits/perquisites need not be examined. While this may reduce the burden of the provider of the benefits/perquisites, the non-assessment of taxability of benefits/perquisites makes it difficult for the recipient of benefits/perquisites to claim TDS credit. It is pertinent here to discuss, Section 28(iv) in brief. Section 28(iv) does not cover monetary benefits, as held in the decision of Mahindra & Mahindra Ltd. (404 ITR1), however, the CBDT clarifications have stated that the perquisites and benefits may be partly/fully in kind. This may lead to a double deduction of TDS, as the cash components of the benefits partly in kind and partly in cash, may be taxed twice.

· The guidelines of CBDT state that the valuation of the benefit should be based on the fair m a r k e t value of the benefit/perquisite. This guideline is subject to certain exceptions, one exception being that the benefit must be purchased, prior to its provision and not after. This exception may hold good for capital assets, but it has not been clarified, how would this exception operate where benefits/perquisites are in the form of services or facilities. Moreover, in the absence of a clear definition of fair market value, it may be difficult to ascertain the exact value of the benefits/perquisites.

· The guidelines are loosely framed, and consideration has not been given to the fact that the FMV of different goods may differ based on the places where they are provided.

· Charging TDS on reimbursable expenses may lead to implementation challenges. One condition for such expenses to be included in the ambit of benefits/perquisites is that the invoice should be in the name of the service provider. However, the service providers may devise mechanisms to avoid TDS by creating receipts in the names of third-parties or even service recipients themselves, to avoid TDS.

· Sales discounts, cash discounts and rebates are exempt from Section 194R. However, free samples are included within its ambit. This would again face implementation challenges, as there may not be fair reporting of any free samples received.

· An important thing to note about Section 194R is that it is applicable only to residents. Hence, if you provide any benefit/perquisite to a non-resident, this provision will not be attracted.

Who may be Impacted?

Pharmaceutical representatives, social media influencers etc. are some professionals that routinely are the recipients of benefits and perquisites, arising in the course of their business/profession. The additional obligation of deducting TDS on the provision of benefits/perquisites, may deter the provision of benefits/perquisites. Businesses and professions where giving of benefits/perquisites is common, to conduct a FMV assessment of each benefit/perquisite, prior to giving it to the intended recipients would increase costs as well as curb convenience. Brands which use variety of social media influencers to promote their products, will now have to think twice. Moreover, where the benefits/perquisites are completely in kind, deduction of TDS would also prove to be complex and confusing. However, it may be noted that Section 194R does not apply to individuals and HUF whose gross receipts and turnover does not exceed INR 1 Crore in business or INR 50 Lacs in profession.

Conclusion

The coming into effect of S.194R would increase the compliance burden on companies covered by the said provision. Remuneration in the form of benefits and perquisites would need to be identified in order to remain compliant. Companies can comply by keeping a track of the following:

· Reimbursable expenses.

· Benefits/perquisites being given.

· Expenses spent on conferences.

If the perquisites are purchased prior to their provision, then receipts to that effect should be maintained. Government on the other hand would need to devise a strong implementation plan to ensure that Section 194R is not violated, as many may not report the benefits/perquisites received/granted.