Section 194R of Income Tax Act: Applicability, Purpose & Scope

Many businesses or professions extend numerous benefits, perks, incentives or prerequisites to its dealers, distributors and agents to market their business or promote their products. These benefits, whether monetary or non-monetary, were not getting recorded as income tax from the beneficiary’s end and therefore had no accountability. Incentives such as gift cards or travel packages are some of the examples of these benefits. This is where section 194R becomes an important tool in the financial system of the country.

The Finance Act of 2022 introduced the section 194R to the Income Tax Act, 1961 that entails tax deductions related to any benefits and prerequisites given to a resident Indian by business and professionals. The section mandates a deduction of 10% TDS deduction by the business or professional paying for the benefits or prerequisites.This article gives a thorough overview of what is section 194R, the applicability of the section, information on TDS deductions and more.

Purpose of Section 194R

The primary purpose for introducing section 194R to the Income Tax Act, 1961 is to block any possibilities of tax evasions and create more financial transparency in the system. Since a few companies were claiming tax benefits while providing incentives, perks and prerequisites to its channel partners or dealers, which was getting evaded as per the tax norms. For instance, a laptop company gave benefits in the form of laptops and accessories to its dealers who were able to meet a certain target. These benefits were getting tax benefits as the company included these in their profit and loss account. The beneficiaries were not recording these benefits in their income tax return files since these benefits were not in the form of cash. But since these are incentives, these should have been added in the income source as per the Income Tax Act, 1961. According to the section 28 (iv) of the Income Tax Act, 1961, any person receiving incentives in the form of benefits or prerequisites, whether these can be converted to money or not, from business or profession must add it as a business income.As per the section 194R of Income Tax Act, 1961, any business or profession that is providing benefits to its dealers or channel partners in partly cash or kind, needs to deduct tax. If the benefits provided by the business or profession is wholly in kind, then they need to deduct the tax based on the cost of the benefit provided. Therefore, the section 194R has removed any possibilities of tax evasions while ensuring transparency.

Scope of Section 194R

The section 194R of the Income Tax Act,1961 has come into effect starting from 1st of July, 2022. The TDS of 10% is to be charged on the benefits or prerequisites provided by a business or profession to the beneficiary. However, the beneficiary needs to be a resident Indian and the tax is only applicable when the total sum of value of the benefits or prerequisites received by him or her should not exceed INR 20,000 during the financial year.

Section 194R - Applicability

The section 194R of Income Tax Act, 1961 applies to any resident Indian who receives any gifts, perks, incentives or prerequisites from a profession or business in the form of monetary or non-monetary benefits, and those benefits or prerequisites are more than INR 20,000 in value during the financial year of the recipient.

TDS Deductor under Section 194R

When any business or profession gives any benefits, perks, incentives or prerequisites worth more than INR 20,000 to any of their channel partner, agent, distributor, dealer or any other person with whom they are conducting business or have a professional relationship with, they need to deduct TDS as per the section 194R. The threshold amount is applicable to the financial year of the recipient. However, the section is not applicable to any Hindu Undivided Family (HUF) or individual whose yearly sales do not exceed INR 1 crore, if they own a business and INR 50 lakh if in case of a profession. This applies to the immediate prior financial year. Also Read: Tax Deducted At Source: Meaning, Returns, Filing And Due Dates

The section on TDS rate came into effect on the 1st of July, 2022. The applicable TDS rate is 10%. So, any professional or business is required to deduct a TDS of 10% when the amount or value of the benefit, perk or gift is more than INR 20,000 during the financial year of each recipient.

TDS Certificate

A TDS certificate needs to be furnished by the person who is releasing the benefits to the one receiving them. This certificate is issued on a quarterly basis in Form 16A. The tax deductor can download this form from the Traces account. Even the deductee can see all the details in their Form 26AS.

File returns for TDS under Section 194R

The person who is liable to deduct tax as per the section 194R needs to file TDS returns on a quarterly basis in form 26Q.

TDS Deductions on Benefits or Prerequisites

The TDS for the benefits or prerequisites must be deducted by the person who is releasing them. They need to ensure that the applicable taxes are deducted before providing the benefits or prerequisites. These taxes can be deducted taking into consideration any of the following provisions:

• The payer can pay the TDS amount himself or deduct the tax by calculating it by grossing up the net amount
• In case the payee gives the TDS amount to the deductor in cash and the deductor deposits the same amount as TDS
• If there is a credit balance with the payee then the payer can subtract the TDS from the credit balance amount and then pay the net amount once he has deducted the TDS amount

It needs to be noted here that if the TDS amount is being paid by the payee on his own then he needs to provide the challan to the payer. This would help the payer while filing the TDS return to consider the ‘Advance Tax’ challan. Also Read: What is Advance Tax Payment? - Guide to Advance Tax in India

Inapplicability of section 194R

The section 194R is not applicable in certain scenarios and these are when:

• An employee receives any benefit or gift from his or her employer. This is strictly when an employer-employee relationship exists. In such scenarios, section 192 will be considered and applicable.
• There is no business relationship.
• The recipient of the benefit is a non-Indian. In such a case, taxes are deducted as per section 195.

According to the Central Board of Direct Taxes, the cost of the benefit or prerequisite needs to be calculated depending on the market value or purchase cost of the benefit. But there are a few exceptions to this provision. These are:

• If the manufacturer of the benefit is the benefit provider himself, then the cost that it charges to its customers will be considered as the value of the benefit. For example, if a travel company provides a travel package as a benefit, then the cost of the travel package that is charged from its customers, is the price of the benefit as well.
• If the benefit provider has paid for the benefit then the price of the benefit will be same as the purchase price.

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