Traders, Wholesalers, Stockiests & Distributors have to pay taxes on Free Gifts & Tours received from their Companies @ 194R

New TDS u/s 194R on Business Promotion Expenses and resultant benefits to recipients:

1)?????Business promotion expenditure expended by an organisation and benefits received by

the recipients of the business promotion Expenditure in excess of Rs.20, 000 in a year will attract TDS @ 10% and the same will have to have included as Business Income by the recipient.

2)?????The Recipient has to offer the Value of such Benefit/Perquisite for taxation in its IT Returns under PGBP (Profits and Gains from Business and Profession) u/s Section 28(iv) which provides for charging as PGBP ?the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;

3)?????TDS of 10% needs to be deposited before providing the benefit/perquisite

4)?????Benefit/Perquisite has to be provided in Kind

5)?????There must exist nexus between the business of the recipient resident & benefit provided to B2C benefits (like Discounts, Commissions & Credit Notes) will not?come under the purview of 194R/ 28(iv)

6)?????Limits: No tax is to be deducted if the value or aggregate value of the benefit or perquisite paid or likely to be paid to a resident does not exceed Rs. 20,000 during the financial year.

7)?????This amendment will take effect from 1st July, 2022.

New IT S. 194R for 10% TDS on benefit/ perquisite of a business/ profession

Budget 2022 proposed to introduce TDS at the rate of 10% of the amount of benefit or perquisite of a business or profession, under new section 194R of Income Tax Act.

As per Memorandum - Page 51-TDS on benefit or perquisite of a business or profession

As per clause (iv) of section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite. However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income.

As per Budget Speech, Rationalizing TDS Provisions:

1)?????It has been noticed that as a business promotion strategy, there is a tendency on businesses to pass on benefits to their agents. Such benefits are taxable in the hands of the agents. In order to track such transactions, I propose to provide for tax deduction by the person giving benefits, if the aggregate value of such benefits exceeds Rs.20,000 during the financial year

2)?????As per the amendment the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite.

3)?????However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income.

4)?????Accordingly, in order to widen and deepen the tax base, it is proposed to insert?a new section 194R to the Act to provide that the person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from carrying out of a business or exercising of a profession by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite. For the purpose of this section, the expression ‘person responsible for providing’ has been proposed to mean a person providing such benefit or perquisite or in case of a company, the company itself including the principal officer thereof.

5)?????Benefit or perquisite covered is the one arising from business or exercise of a profession; hence there must exist a nexus between the business of the recipient resident & benefit provided to him.

6)?????In context of section 28(iv), it is held?that words "benefit" or "perquisite" is to be read together and would draw colour from each other.

Normally, the term "perquisite" denotes:

(a) Meeting out of an obligation of one person by another person either directly or indirectly, or

(b) Provision of some facility or amenity by one person to another person and from the very beginning, the person providing such facilities or concessions knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or right of that person.

In this view of the matter, the word "benefit" has also to be interpreted in the same manner i.e. at the time of execution of the business transaction, the one party should give to the other party some irretrievable benefit or advantage.

Section 28(iv) aims at taxing fringe benefits that are availed in addition to consideration earned in carrying out a profession or while doing business. Therefore, it can be understood that when consideration is circumvented & paid in the form of benefit or perquisite, section 194R will be attracted.

8)?????Further, in a case where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite, the person responsible for providing such benefit of perquisite shall, before releasing the benefit or perquisite, ensure that tax has been paid in respect of the benefit or perquisite.

Examples:

1.??????An insurance company decided to provide TV of Rs. 50,000/- to an agent who clocks insurance premium Rs. 10 Lakhs in one quarter. Now, this will be subject to the TDS provision @ 10% (Rs.5,000/-) ?and the agent has to disclose in his ITR as PGBP Rs.50,000/-

2.??????An Electronics company decided to offer the tour to Dubai for the dealer who makes the purchases Rs. 1 Crore in one year. Now, this will be subject to the TDS provision and TDS @ 10% will be done on the basis of market value of the trip (say Rs.70,000/- paid by Electronics company, thus TDS of Rs.7,000/-). The same (Rs.70,000/-) has to be disclosed by the dealer under PGBP

3.??????Tour packages given to health professionals by pharma companies for promoting their medicines. Pharma Company has to deduct TDS @ 10%. ?And health professional has to offer this as Income in their Tax Return. Incase this is not as per the Law for the doctors to receive, then the Company will not be allowed deduction under PGBP for the same with changes made in Section 37(1) in Budget 2022.

4.??????Mr. X is the Authorised Dealer of a Pharma Company. The Pharma Company gives a foreign trip as an incentive to Mr. X valued at Rs. 2 Lakhs. Mr. X earned a net profit of Rs. 10 Lakhs from the sale of goods. For the purpose of income tax, Rs. 2 Lakhs should also be included in the total income as this amount is derived as a benefit or perquisite in the course of business by Mr. X.

5.??????Cement Company announces foreign trip for their Distributors, Stockiest & Retailers for achieving targeted turnover in a given period (Month, quarter, annual or seasonal). Before making payment for the foreign trips to travel company (say Rs.60, 000), Cement Company has to deposit TDS @ 10% (Rs.6, 000/-) on their cost (paid to Tour Company). These Distributors, Stockiest & Retailers have to include this benefit (Rs.60, 000/-) in their Income Tax Return and offer the benefit for taxation and they would get credit of TDS (Rs.6, 000/-) paid by Cement Company.

CA Harshad Shah, Mumbai ([email protected])