Section 194R of Income Tax Act: Purpose, Applicability, and TDS Compliance
Updated: Oct 3
Section 194R of the Income Tax Act mandates the deduction of tax at source (TDS) on any benefits or perquisites provided in the course of business or professional activities. This section ensures that recipients of non-monetary or indirect benefits from businesses or companies are taxed appropriately, thus closing potential loopholes where income could otherwise go untaxed.
Section 194R applies to any entity providing such benefits—whether in cash, property, or a combination of both—and establishes a 10% TDS deduction when the value of the benefit exceeds the prescribed limit. Whether you're a business providing perks to clients, distributors, or professionals, understanding the intricacies of this section is crucial for ensuring compliance with tax laws.
In this article, we will explore the purpose of Section 194R, its applicability, and the key aspects of TDS compliance that businesses and professionals need to be aware of.
Table of Content
Salient Features of Section 194R
Applicability of 194R for Monetary and Non-Monetary Benefits
There are specific provisions in the Income Tax Act, which provide for taxation of any type of gift, perk, incentive, or any other benefit received by any person from any business or professional engagement. One of the main provisions is Section 194R of the Income Tax Act, 1961, which states that TDS shall be deducted when the threshold for such benefits exceeds INR 20,000.
Salient Features of Section 194R
Scope of Application: Section 194R is applicable in cases where the total value of any benefit or perquisite, whether in cash or kind, received by a business or profession from any resident person, during the financial year, exceeds INR 20,000. Such a limit has been prescribed separately for each recipient.
Nature of Benefits: The provision is very broadly worded and covers benefits in cash, kind, or in part cash and part kind to bring such benefits into account for tax purposes.
Responsibility for TDS: Any businessperson or professional, providing such benefit, shall be liable to deduct TDS if the value given to a single recipient during a financial year exceeds INR 20,000.
Exemptions and Conditions:
For Businesses: Any person or Hindu Undivided Family (HUF) engaged in business has been exempted from the obligation of TDS deduction under this section if their total turnover or gross receipt from business or profession in the preceding financial year is less than INR 1 Crore.
For Professions: In the case of professions, the entity is exempt if its gross receipt does not exceed INR 50 Lakh in the previous financial year where the case is related to professional practice.
Section 194R of Income Tax Act: Understanding the Liability for TDS Deduction
Under section 194R of the Income Tax Act, any business or profession providing any benefit or perquisite to an agent, channel partner, dealer, distributor, or any other person is required to deduct TDS if the value of such benefit or perquisite exceeds the threshold limit in a financial year for a single recipient.
Points on Section 194R:
Applicability: This provision applies to any business or professional entity that pays or provides any benefit or remuneration exceeding the monetary threshold to any single recipient in a financial year.
Small Business and Professionals Exemption:
Any person or Hindu Undivided Family whose total sales, turnover, or gross receipts during the previous financial year do not exceed INR 1 Crore in case of business and INR 50 Lakh in case of profession need not deduct TDS under this section.
Purpose: The legislation aims at improving TDS compliance and bringing in accountability for benefits or perquisites provided during the course of business or profession and accounting for the same for tax purposes.
Significance of Section 194R in Preventing Tax Evasion
Section 194R aims to tackle the issue of tax evasion. In the past, businesses would provide various perks, benefits, and non-monetary advantages to their dealers, partners, and other individuals. However, these businesses would often claim such expenses as legitimate business costs while the recipients of these benefits would not disclose them as part of their income.
To curb this practice and ensure fair taxation, Section 194R was introduced. This section holds significance in fostering transparency and accountability by ensuring that such benefits are appropriately accounted for and taxed. Its implementation serves as a deterrent against tax evasion practices, promoting a fair and equitable tax system.
A Simplified Process to TDS Deduction on Benefits or Perquisites
With regard to deducting TDS on benefits or perquisites, the responsibility lies with the entity providing these benefits to ensure that the necessary tax is deducted and paid before releasing them to the recipient. To fulfill this obligation, the payer has several options to discharge their TDS liability.
One approach is for the payer to either gross up the net amount by adding the applicable tax or to directly pay the tax from their own funds. Alternatively, if the payee provides cash to the payer specifically for meeting the TDS liability, the payer can use those funds to make the required tax deposit. Another option is to deduct the TDS from any credit balance the payee may have, and subsequently pay the net amount after deducting the TDS.
By following these procedures, the deductor can fulfill their TDS obligations while ensuring that the benefits or perquisites are appropriately accounted for in terms of tax liabilities. This systematic approach promotes compliance and transparency in the deduction of TDS on benefits or perquisites.
Simplifying TDS certificates
As per tax regulations, it is the responsibility of the deductor to issue a TDS certificate to the deductee on a quarterly basis. This certificate, known as Form 16A, serves as proof of the tax deducted at the source. Both the deductor and deductee have access to this certificate for reference and verification.
The deductor can conveniently download Form 16A from their Traces Account, ensuring an efficient and streamlined process. On the other hand, the deductee can easily view the same certificate in their 26AS, which is an annual consolidated statement of their tax-related transactions.
Streamlining TDS returns
As per the provisions of the Income Tax Act, the deductor responsible for deducting tax under Section 194R is required to file quarterly returns in Form 26Q. This process of filing TDS returns ensures compliance with tax regulations and facilitates the effective monitoring of tax deductions.
The introduction of withholding provisions under Section 194R serves a vital purpose: to capture income derived from non-monetary perquisites and expand the scope of taxable income.
These perquisites often went unreported at the recipient's end, leading to a gap in the taxation process. By implementing the withholding provisions, the tax authorities aim to address this issue and ensure a wider tax net.
The filing of TDS returns in Form 26Q allows for accurate reporting and documentation of tax deductions made under Section 194R.
Exemptions under Section 194R
To provide clarity and ensure fairness, Section 194R of the Income Tax Act outlines certain exemptions related to benefits or perquisites. These exemptions serve as exceptions to the general rule of tax deduction.
Let's explore the key exemptions under Section 194R:
Non-Business or Non-Professional Connection: If a benefit or perquisite is unrelated to the conduct of business or profession, it may be exempt from a tax deduction.
Low-Value Benefits or Perquisites: When the value or aggregate value of a benefit or perquisite is below INR 20,000 in a Financial Year, it may be exempt from a tax deduction. This exemption recognizes that smaller benefits or perquisites may not warrant tax implications.
Deductor's Gross Receipts or Sales Turnover: In the case of individual or Hindu Undivided Family (HUF) deductors, if their gross receipts or total sales turnover falls below INR 1 Crore (for business) or INR 50 Lakhs (for the profession), they may be exempt from a tax deduction.
Analysis of Section 194R of the Income-tax Act, 1961
In the year 2022, the Finance Act introduced Section 194R, a pivotal addition to the Income Tax Act of 1961, specifically addressing the deduction of tax concerning benefits or perquisites related to businesses and professions.
It is a common practice for businesses, corporations, and entities to extend various types of benefits and perquisites to their distributors, channel partners, agents, or dealers as an enticement to spur further business growth. These inducements can encompass an array of offerings, including travel packages, gift cards, incentive scheme products, or the utilization of corporate assets, among others.
Section 194R: Nexus with Business or Profession
Section 194R lays out the parameters for the deduction of tax in cases where any individual, resident in India, offers benefits or perquisites, whether in convertible form or not, stemming from their involvement in a business or the exercise of a profession. Prior to dispensing such benefits or perquisites, the provider must ensure that the necessary tax deduction has been executed.
To put it simply, Section 194R mandates Tax Deducted at Source (TDS) when a resident provides benefits or perquisites to another resident. These benefits can be either in the form of tangible assets or monetary rewards and should originate from activities aimed at promoting a business or profession.
Who Should Deduct TDS Under Section 194R?
Whenever a business, company, or professional entity confers benefits or perquisites to agents, dealers, channel partners, distributors, or any other party during a fiscal year, they are legally bound to deduct TDS in accordance with Section 194R.
Why was Section 194R Introduced?
The introduction of Section 194R within the Income Tax Act is primarily driven by the need to curb tax evasion. Historically, many companies adopted the practice of providing gifts, perquisites, and other promotional benefits to their dealers while simultaneously claiming deductions for these expenses from their business income. Furthermore, individuals who received such benefits often neglected to report this income, especially when it was provided in kind, leading to a significant shortfall in tax revenue. In response to these tax evasion concerns, the government enacted Section 194R, which unequivocally stipulates that any benefit, be it in cash or kind, received by a resident individual from a business or profession is subject to taxation.
Illustratively, consider the case of ABC Ltd., a car manufacturer that, in the past, rewarded dealers with cars upon achieving their annual targets. Prior to Section 194R, businesses routinely categorized these incentives as legitimate business expenses, thereby reducing their taxable income. With the enactment of Section 194R, however, all benefits provided by businesses or professions, whether in cash or kind, have become taxable. Consequently, this statutory provision has empowered the government to more effectively monitor income and deter tax evasion.
How is the TDS Deducted?
Under the Tax Deducted at Source (TDS) system, the person in charge of making certain kinds of payments withholds a predetermined amount of tax before releasing the funds to the receiver. The first step in the procedure is determining if a payment is subject to TDS regulations. This is done by consulting the Income Tax Act's sections that list the categories that are subject to TDS, including interest, salaries, rent, and professional fees. For transactions involving TDS, the deductor, or the organization making the payment, has to have a Tax Deduction and Collection Account Number (TAN).
The deductor uses rates specified in the Income Tax Act to determine the TDS amount after establishing the TDS application. Then, TDS is subtracted at the time of the payee's payment, and the subtracted money is transferred to the government via approved bank branches using Challan 281 within the allotted period. The quarterly TDS returns, which include a breakdown of the TDS deducted and deposited, must be filed by the deductor. The deductee receives TDS certificates, which include relevant information and are in the form of Form 16 for salary TDS. In turn, the deductee adjusts the TDS amount against their overall tax burden when completing their income tax return and receives credit for it. Following these procedures is essential to avoiding fines and guaranteeing compliance with the Income Tax laws regarding TDS.
How is the Value of Benefit Calculated Under Section 194R of the Income Tax Act?
The Central Board of Direct Taxes (CBDT) prescribes the method for computing the value of perquisites. Generally, the fair market value of the benefit serves as the basis for this calculation. Nevertheless, certain exceptions apply:
If the benefit provider has acquired the benefit or perquisite through purchase or by paying consideration, the value of the perquisite shall be deemed equivalent to the purchase price.
When the benefit provider is also the manufacturer of the benefit, the value of the perquisite shall correspond to the price charged to its customers.
FAQs:
Q1. Does section 194R apply to employees?
Section 194R does not apply to benefits or perquisites given to employees if TDS has already been deducted under section 192 of the Income Tax Act.
Q2. Is it necessary for the advantage to be in the form of property for section 194R of the act to apply?
The advantage can be in the form of cash, property, or a combination of both.
Q3. Is section 194R applicable to companies?
Yes, the TDS provisions outlined in section 194R are applicable to companies if they provide benefits or perquisites to a resident that exceed the prescribed limit.
Q4. What does TDS section 194R entail?
TDS section 194R requires the person responsible for making payments of benefits or perquisites arising from business or profession to deduct tax at source.
Q5. What is the significance of section 194R in income tax?
Section 194R is a TDS provision that mandates a 10% tax deduction by the person making payments of benefits or perquisites to a resident.
Q6. Is Section 194R applicable to gifts, benefits, or perks received during special occasions such as festivals or marriage ceremonies?
No, Section 194R exclusively applies to benefits and perquisites originating from business or professional activities. It does not pertain to gifts or perks received during personal or celebratory events.
Q7. What is a TDS certificate?
TDS certificates, which encompass Form 16, Form 16A, Form 16B, and Form 16C, serve as documentation of tax deductions at source. Entities deducting TDS must issue these certificates to individuals from whose income tax was withheld during payments.
Q8. If the benefit provided is non-monetary, how is its value determined for tax deduction purposes?
For non-monetary benefits or perquisites, the value is computed based on the fair market value of the items or assets provided.
Q9. Will discounts, cash discounts, and rebates be considered as benefits or perquisites under Section 194R?
No, discounts and rebates are distinct from benefits or perquisites. They are subtracted from the sale price and, as such, are not categorized as benefits or perquisites under Section 194R.
Q10. Does Section 194R apply to non-residents?
No, Section 194R applies only to benefits or perquisites provided to resident individuals or entities. For non-residents, different provisions under the Income Tax Act would apply.
Q11. What is the threshold limit for TDS deduction under Section 194R?
TDS under Section 194R is applicable if the value of the benefits or perquisites provided exceeds INR 20,000 in a financial year.
Q12. Is Section 194R applicable to free samples or promotional items provided by businesses?
Yes, Section 194R applies to free samples or promotional items provided as part of business or professional activities. The value of such items is considered for tax deduction purposes.
Q13. Can TDS under Section 194R be deducted in installments?
No, TDS under Section 194R must be deducted at the time the benefit or perquisite is provided. There is no provision for deduction in installments.
Q14. How does Section 194R impact charitable organizations that receive benefits or perquisites?
Section 194R does not apply to benefits or perquisites provided to charitable organizations if these organizations are exempt from income tax under specific provisions of the Income Tax Act.
However, it’s important to review the nature of the benefit and the organization’s tax-exempt status.
Q15. Is Section 194R applicable to reimbursements?
No, genuine reimbursements of expenses do not fall under Section 194R, provided they are directly linked to the business or profession and supported by proper documentation.
Q16. How should the benefit or perquisite be valued if it is in the form of services?
In the case of services, the fair market value of the service provided will be considered for TDS deduction under Section 194R. The valuation must be reasonable and reflective of the actual market value.
Q17. Who is responsible for deducting TDS under Section 194R?
The person or entity providing the benefit or perquisite is responsible for deducting TDS under Section 194R before the benefit or perquisite is provided.
Q18. Does Section 194R apply if the benefit or perquisite is given as a loan or advance?
Yes, if the loan or advance given is in the nature of a benefit or perquisite and is linked to business or professional activities, Section 194R may apply.
Q19. Is Section 194R applicable on travel and accommodation expenses provided by companies to their clients or associates?
Yes, if the travel and accommodation expenses are provided as part of business promotion or client engagement, the value of these expenses may be subject to TDS under Section 194R.
Q20. Can the recipient claim a refund of TDS deducted under Section 194R?
Yes, the recipient can claim credit for the TDS deducted under Section 194R when filing their income tax return. If the tax liability is less than the TDS deducted, they can claim a refund for the excess amount.
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