Know all about section 194R

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Section 194R- TDS on benefit or perquisite of a business or profession from the finance bill 2022

Know all about section 194R

Clause 58 of the finance bill 2022 proposes to insert new section 194R in the Income tax act 1961 to track & tax perquisite of business and profession. In this article I am trying to give brief about section 194R in the form of FAQs for better understanding.

1. What kind of income, section 194R going to cover? 

New section 194R will cover the income falling under clause (iv) of section 28 of the Income Tax Act. i.e. Income falling under the head of Profits and gains of business or profession.

2. Which is the income covered by section 28 clause (iv)?

Section 28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",

(i)....

(ii)....

(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession 

Now vide finance bill 2022 this income will be subject to TDS under section 194R if received by resident person.

3. What is the meaning of benefit or perquisite under the section 28?

Benefit/perquisite means facility/amenity /freebies given to a person while executing business transactions. Such kind of perquisites are provided over and above consideration of the transactions. E.g. a) provision of free mobile cell phones to distributors subject to sale of "N" number of cell phones during the particular period. (i.e. upon meeting sales target);
b) Tour packages given to health professionals by pharma companies for promoting their medicines;
c) Finance companies provides Mobile phones to employee on conversion of loan enquiries into lead.

4. Why the Government is proposing section 194R?

Business perquisite and benefits are chargeable to tax u/s 28(iv) , however most of the time recipient of the perquisite tends to hide such freebies from Tax. Some time taxpayers forget to report perquisite in kind in tax returns etc. which leads to inaccurate filing of tax returns. In order to track all such revenue leakage government proposing 194R so that person paying such perquisite will report it to government.

5. Who will be liable to deduct TDS u/s 194R?

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.  In simple words person who is going to provide free benefits/perquisite will be liable to Tax.

6. Who all are not required to deduct tax u/s 194R?

Individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided.

Also, any benefit given to non-resident will not fall under section 194R.  

7. Is there any threshold limit provided for deduction of tax u/s 194R?

Yes, person providing benefit will deduct tax only of value of perquisite exceeds Rs 20,000 during the financial year. As per circular No 12/2022 dated 16th June 2022 perquisite provided up to 30/06/2022 will be counted to check threshold of Rs. 20,000. However, the benefit or perquisite which has been provided on or before 30th June 2022, would not be subjected to tax deduction under section 194R of the Act.

8. What are the provisions of section 194R in case of perquisite in kind or partly in kind and partly in cash?

In such situation the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax has been paid in respect of the benefit or perquisite.

9. What would be the rate of deduction of tax under section 194R?

Payer of the benefit shall deduct tax at the rate of 10% of the value or aggregate of value of such benefit or perquisite.

10. From which date section 194R will be operational?

As per clause 58 of the finance bill 2022, section 194R will be operational w.e.f. 1st July, 2022

CBDT has issued Circular No 12/2022 dated 16th June 2022 which provides guidelines for removing difficulties in implementing section 194R. 

Interesting and important clarification from the above circular:

Q: Many a times, a social media influencer is given a product of a manufacturing company so that he can use that product and make audio/video to speak about that product in social media. Is this product given to such influencer a benefit or perquisite? 

Answer: Whether this is benefit or perquisite will depend upon the facts of the case. [n case of benefit or perquisite being a product like car, mobile, outfit, cosmetics etc and if the product is returned to the manufacturing company after using for the purpose of rendering service, then it will not be treated as a benefit/perquisite for the purposes of section 194R of the Act. However, if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the Act. 

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