Section 194R Of the Income Tax Act: Implementation Guidelines

Introduction

What is Section 194R?

Picture this: you successfully reached the target sales, and the company declared ₹30,000 as a sales incentive. But while receiving, you get ₹27,000. The amount here got reduced due to the mandate of deducting TDS as per a direct tax rule.  

Section 194R of the Income Tax Act requires the deduction of TDS (Tax Deducted at Source) on any benefits or perquisites offered in the course of business or profession. These benefits can be gifts, incentives, travel perks, or other non-cash payments from agents, distributors, or partners.

Purpose and Importance of Section 194R

Section 194R of the Income Tax Act was introduced to prevent tax evasion on non-cash benefits provided by businesses. Previously, companies offered dealers gifts or incentives, claiming these as business expenses, while recipients didn’t report them as income. Section 194R ensures that any benefit, whether cash or kind, is taxed properly, similar to how income tax calculation on salary ensures that earnings are taxed accurately.

Applicability of Section 194R

Who Needs to Deduct TDS Under Section 194R?

Any entity – whether a business, firm, or professional – must deduct TDS under Section 194R if it provides benefits or perquisites exceeding ₹20,000 to a resident in a financial year. This includes gifts, incentives, or rewards from employees, agents, distributors, or consultants. 

Applicability of Gifts, Perquisites, and Non-Cash Benefits

The types of benefits covered under the 194R Income Tax Act include:

• Gift vouchers, electronic gadgets, or other incentives given to distributors or agents.
• Free trips or hotel stays offered as incentives.
• Free products given to business partners or influencers.
• Tickets for events or entertainment shows.
• Free medical samples to medical practitioners or access to training programs.

For example, if a company provides ₹30,000 worth of stock advisory services to a consultant, TDS of 10% (₹3,000) will be deducted under Section 194R. The company then deposits this amount with the government. The recipient can claim ₹3,000 as a tax credit when filing their return, reducing their tax liability. The company can then deduct the ₹3,000 from its business income, as an expense, lowering its taxable income for the year.

Persons Covered Under Section 194R

Section 194R applies to:

• Businesses and companies with gross receipts exceeding ₹1 crore in the previous financial year.
• Professionals with gross receipts exceeding ₹50 lakh in the previous financial year.
• Any person or entity providing benefits or perquisites exceeding ₹20,000 to a resident in a financial year.

TDS Rate and Threshold Limit Under Section 194R

Applicable TDS Rate

Under Section 194R of the Income Tax Act, the TDS rate is 10% on the value of any benefit or perquisite provided. However, according to Section 206AA, if the recipient fails to provide their PAN, the TDS rate is increased to 20%. 

Additionally, if the individual has not filed their return of income, Section 206AB comes into play, and the TDS rate could be higher, either twice the rate specified in the applicable provision or 5% of the benefit amount, whichever is higher.

Threshold Limit for Deduction

The threshold limit for TDS deduction under 194R is ₹20,000 in a financial year. If the total value of benefits provided exceeds this limit, TDS is applicable.

Exceptions to TDS Deduction Under Section 194R

Nature of Exempt Transactions

Certain transactions are exempt from TDS deduction under 194R, including:

• Benefits provided to employees by their employers (these are taxed under Section 192).
• Benefits given to non-residents are not taxable in India (tax is deducted under Section 195).
• Benefits where the total value does not exceed ₹20,000 in a financial year.
• Benefits are when there is no business relationship between the two parties.

Cases Where 194R Does Not Apply

• Discounts, rebates, and sales promotions offered to customers.
• Cashbacks provided under consumer loyalty programs.
• Free products or services offered in promotional offers (e.g., “buy one, get one free”).
• Reimbursement of out-of-pocket expenses, as long as the original expenses were paid by the individual and reimbursed later by the business (e.g., travel expenses reimbursed by a client to a consultant).
• Charitable institutions that are not involved in business or a profession provide benefits.

Compliance Requirements for Section 194R

Timing of TDS Deduction

TDS under 194R must be deducted when providing the benefit or when crediting the amount, whichever is earlier.

Deposit of TDS with the Government

The deducted TDS must be deposited with the government by the 7th of the following month. For example, TDS deducted in April must be deposited by May 7th. However, TDS payment for March can be deposited with the government by the end of April. 

Issuance of TDS Certificate (Form 16A)

A TDS certificate in Form 16A must be issued to the recipient, indicating the amount deducted and deposited. This helps maintain transparency and assists the recipient in filing their income tax return.

Reporting in TDS Returns (Form 26Q)

All deductions under 194R must be reported in the quarterly TDS returns filed using Form 26Q. The due dates for filing these returns are:

• July 31st for Q1 (April to June)
• October 31st for Q2 (July to September)
• January 31st for Q3 (October to December)
• May 31st for Q4 (January to March)

Implementation Guidelines Issued by CBDT

Clarifications on Valuation of Benefits

The CBDT has clarified that the value of benefits or perquisites under Section 194R should be the fair market value, not the book value. In cases where the benefit is provided at a concessional rate, the fair market value must be used for TDS calculation.

An exception to this is when the valuation of benefits will be based on the purchase price in the following cases:

• If the benefit provider has purchased or paid consideration for the benefit. For instance, a marketing firm purchases a premium smartwatch worth ₹25,000 to gift to its top-performing consultant. Since the firm bought the watch for ₹25,000, the TDS will be calculated based on this purchase price. Thus, the TDS will be ₹2,500 (10% of ₹25,000)
• In the case of manufacturers, the price charged to the customer will be considered the value of the benefit. Say a smartphone manufacturer gives a Rs. 15000 handset to a retailer as a promotional incentive. Though the company’s manufacturing cost is ₹8,000, the TDS will be calculated at ₹15,000, the price charged to the customer.

Responsibility of Deductors

Businesses must maintain records of all benefits or perquisites provided, including their fair market value, date of issuance, and recipient details. This data will serve as a basis for TDS calculation and reporting.

Examples Provided by CBDT

• Say a company sponsors a vacation package for its top distributor. The package’s fair market value is ₹50,000, but the company acquired it at a discounted rate of ₹30,000. For the TDS calculation, the FMV will be considered, and a TDS of ₹5,000 (10% of ₹50,000) will be deducted.
• For a consultant receiving free stock advisory services valued at ₹30,000, TDS of 10% (₹3,000) applies.

Penalties for Non-Compliance with Section 194R

Interest for Late Deduction or Payment

If the company didn’t deduct TDS, the interest will be calculated at 1% per month from the date it was supposed to be deducted until the date of actual deduction. And if the company deducted TDS but didn’t deposit it on time, the interest will be calculated at 1.5% per month from the date of deduction until the date of deposit.

Penalty Provisions for Failure to Deduct or Deposit TDS

Non-compliance with section 194R of the Income Tax Act attracts two sections-

• Under Section 271C, if a company fails to deduct or deposit TDS, a penalty equal to the TDS amount not deducted or not paid may be imposed.
• Under Section 40(a)(ia), the expense (on which TDS was not deducted) may be disallowed as a business expense.

So, say a company failed to deduct TDS on a ₹30,000 gift to an employee, the penalty will be

• Interest for non-dedication of 1% of the ₹3000 TDS = ₹300
• Penalty under Section 271C: Up to ₹3,000
• Disallowance of ₹30,000 as a business expense (increasing taxable income)

Conclusion

Importance of Proper Compliance with Section 194R

Unlike state-specific obligations like professional tax, which apply to salaries, TDS under Section 194R targets benefits or perquisites in business or profession. Complying with Section 194R ensures accurate TDS deduction and deposit, minimizing the risk of penalties and tax scrutiny.

Impact of 194R on Businesses and Professionals

Adhering to the provisions of the 194R Income Tax Act is important for businesses and professionals as it affects cash flow management, financial planning, and income tax calculation on salary and other earnings. Staying updated with 194R guidelines helps mitigate potential legal and financial repercussions.

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