TDS u/s 194R Explained (effective from 01st July 2022)

W.e.f. 01st July 2022, new TDS provisions u/s 194R shall become effective. 

Section 194R provides for deduction of tax at source at 10% by any person who provides any benefit or perquisite exceeding Rs 20,000 in a year to a resident arising from the business or profession of such resident.
This implies that the deductee should be a person/entity engaged in business or profession. This section shall not apply to any benefit or perquisite given to an employee in course of his/her employment as it is already taxed under the Salary head.

Few examples of where this section shall apply are but not limited to:

1. When a person gives incentives in cash or kind such as TV, car, computers, gold coin, mobile phone, etc.

2. When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets

3. When a person provides a free ticket for an event

4. When a person gives medicine samples free to medical practitioners

It is not required to check whether the amount is taxable or not in the hands of the recipient. The TDS provision u/s 194R shall apply even if the recipient of the benefits or perquisites does not report such receipt of benefits in their income tax return.

The scope of the said provision includes situations where the benefit or perquisite is received in kind, in cash, or partly in kind and partly in cash. 

Valuation of the benefit/perquisite: The fair market value (FMV) of the benefit or perquisite provided to the recipient shall be used for valuation purposes. However, if the benefit or perquisite is purchased before providing it to the recipient, it will be valued based on its purchase price. If the benefit or perquisite is manufactured, it must be valued based on the price charged to the customers.

Calculation of the threshold limit: Section 194R will be triggered if the value of the benefit or the perquisite exceeds Rs 20,000 during the year (including the period 1st April 2022 to 30th June 2022). However, the benefits provider should deduct TDS under the said section only on the benefits or perquisites provided after 1st July 2022.

How to deduct tax on benefits in kind?: If the benefit or perquisite is to be provided in kind, the deductor has to ensure that the recipient of such benefit pays advance tax on the value of such benefit.  Alternatively, the benefits provider may pay TDS to the government under Section 194R (TDS to be also considered as part of the benefit).

Certain other examples to understand the applicability of TDS under this section:
1. A product of a manufacturing company given to the social media influencer to promote it on social media shall be considered as a benefit or perquisite if the product is not returned.
2. Any expenses incurred by a person in a business or a profession, if paid by the customer/service recipient, is in effect a benefit/perquisite provided by the customer/service recipient to the first person in the course of business/profession. However, if the business/service provider pays for the expenses and the same is reimbursed by the customer/service recipient, then it is not a benefit or perquisite, provided the invoice is obtained in the name of the customer/service recipient.
3. A seller giving incentives other than discounts or rebates which are in the nature of cash or kind like car, mobiles, etc.

Exceptions to Section 194R (Situations wherein TDS is not required to be deducted under this section):
1. Sales discounts, cash discounts, and rebates allowed to customers
2. Where some units of a product are rewarded on purchase of specific units of the same product (example, BOGO-buy one get one) for a charge or substantial discount
“However, the above exception of non-deduction of tax is not applicable in a situation of free samples, i.e. TDS u/s 194R shall be applicable on free samples subject to the limits stated in this section.”
3. Benefit or perquisite is provided to the government entity not carrying on any business or profession, for example, government hospital, etc.
4. Expenses incurred for the conferences to educate the dealer/business about the product launch, sales techniques, or similar aspects shall not be considered a benefit or perquisite. However, such conferences must not be like incentives or benefits to the select dealer/customers achieving particular targets.