17 June 2022
Government issues guidelines for withholding of tax over benefits and perks provided to business houses

Section 28(iv) of the Income-tax Act, 1961 (the Act) was introduced in Finance Act 1964 to tax the value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of the profession by the assessee. However, even after the completion of more than five decades, there was no such mechanism available to the tax administrators to track whether such benefits and perquisites were actually offered to tax by the recipients. The tax administrators claim that such benefits or perquisites are not offered to tax in many cases. In order to plug the lacuna/ loophole in the law and to have an audit trail of the benefit and perquisite received by the assessee, a new section 194R has been inserted vide Finance Act 2022 to provide for withholding tax on the value of benefit or perquisite.

It is to be noted that the provisions regarding taxability of benefit or perquisite arising in the course of business or profession always existed in the statute books. Thus, if something was not taxable earlier, it will not be taxable now as well. The obligation for withholding tax under the new Section 194R of the Act has been cast upon the person providing such benefit or perquisite. The salient features of Section 194R of the Act are as follows:
  1. The Section 194R of the Act states that the person providing benefit or perquisite to a person carrying on business or profession shall have Tax Deducted at Source (TDS) at 10% rate on the value of such benefit or perquisite provided the value exceeds INR 20,000 during each financial year.
  2. The first proviso to the sub-section (1) states that the deduction has to be made in cases where the benefit is in kind or benefit is in cash.
  3. Individuals and Hindu Undivided Family (HUF) are exempted from withholding provisions if the total turnover from business in the previous year is less than INR 10 million and in the case of the profession, it is less than INR 5 million.

The Central Board of Direct Taxes (CBDT) has now issued clarifications which inter alia include valuation rules to effectively implement provisions relating to withholding of tax on benefit/perquisite and the same is given hereunder:
  • The deductor is not required to check whether the amount is taxable in the hands of the recipient as a benefit or perquisite. Also, the benefit or perquisite provider is not required to check whether the benefit or perquisite is a capital asset like a car, land, etc. The only obligation cast upon the benefit/perquisite provider is to ensure that 10% tax is deducted on the amount of benefit or perquisite provided. Tax is also required to be deducted whether the benefit or perquisite is in cash or in kind.
  • TDS need not be deducted on sales discounts, cash discounts and rebates though they are also benefits related to sales/ purchases. However, exemption from tax deduction is not available in case free samples are provided.
  • It has also been clarified that in a case where benefit or perquisite has been used by the owner/director/employee of the recipient entity, it shall be deemed that the benefit is received by the recipient entity only, although the benefit or perquisite would have been enjoyed by the owner/director/employee of the recipient entity. For example – if free samples are provided to a doctor who is an employee of a company, Section 194R would apply in the hands of the company and not the doctor. The hospital may subsequently treat the said free samples as given to its doctor (i.e., employee) and it will be taxable as perquisite in the hands of the doctor and hence TDS under Section 192 will have to be done by the hospital. In such a case, the hospital would be tax neutral and the real perquisite would get taxed in the hands of the employee doctor.
  • The valuation has to be done as per the fair market value of the benefit or perquisite except in the following cases:
    1. Where the benefit or perquisite is purchased from a third party, the purchase price shall be the value of the benefit or perquisite provided;
    2. Where the benefit or perquisite provider manufactures the items given as benefit or perquisite, then the price it charges to its customers for such items shall be the value of benefit or perquisite provided.
Furthermore, no GST is to be included for the purposes of valuing the benefit or perquisite.
  • It is also clarified that any product given to a social media influencer will amount to benefit/ perquisite in the hands of such person. In the event that the product is retained by such a person, then it will be treated as a benefit or perquisite. If the product is returned to the manufacturer companies, then it will not be treated as a benefit or perquisite. 
  • If any expenditure of a person is met by another person, it would tantamount to benefit or perquisite in the hands of the first-mentioned person. For example – a consultant is providing service to a company and, in turn, receives consulting fees. The consultant has to travel between different cities and pays for boarding and lodging expenses incurred exclusively for rendering his consulting services. The expenditure incurred by the consultant would be deductible against his consultancy fees to determine his total income. However, if the company meets the travel expenditure, it is a benefit or perquisite in the hands of the consultant.

    Further clarity is provided in the scenarios below:
    1. If the invoice (of lodging and boarding) is raised in the name of the company, but the consultant initially pays the same and is later reimbursed from the company, the said reimbursement would not be treated as perquisite in the hands of the consultant.
    2. If the invoice is not in the company’s name, but the company makes the direct payment or reimburses it, then it is to be treated as a benefit or perquisite in the hands of the consultant for which TDS needs to be deducted under Section 194R of the Act.
  • The expenditure pertaining to dealer’s/ business conference would not be considered as benefit or perquisite where such conference is with the prime object to educate the dealers/customers about any of the following or similar concepts: 
    1. New product being launched, discussion as to how the product is better than others.
    2. Obtaining orders from dealers/customers, teaching sales techniques to dealers/customers.
    3. Addressing queries of the dealers/ customers.
    4. Reconciliation of accounts with dealers/customers.
Additionally, it is clarified that the expenditure would be considered as benefit or perquisite where it is attributable to a leisure trip or leisure component even if it is incidental to the dealer/ business conference or incurred for the family members of the person attending the conference.
  • In cases where a benefit is in kind or in cash, but the cash is not sufficient to meet the TDS obligation, the recipient of benefit/perquisite is required to pay tax in the form of advance tax and the said challan is required to be shared with the provider of the benefit or perquisite. The provider of benefit or perquisite will be required to report the same in Form 26Q while filing the TDS return.

    Alternatively, the benefits provider may deduct the tax and pay it to the central government. In such a case, the TDS paid by the provider of benefit or perquisite is also a benefit or a perquisite in the hands of the recipient. This also needs to be reported in Form 26Q.

  • It is clarified that while calculating the threshold of INR 20,000, the value of benefit or perquisite provided during the period from 1 April 2022 till 30 June 2022 shall also be included. If the limit of INR 20,000 is crossed during the period from 1 April 2022 till 30 June 2022, then TDS will apply on any benefit or perquisite provided from 1 July 2022.

    The benefit or perquisite provided on or before 30 June 2022 would not be subjected to withholding tax under Section 194R of the Act.
Our Comments
The issuance of guidelines by CBDT well before the applicability of a provision of Section 194R of the Act was the need of the hour and will go a long way in the effective implementation of provisions of withholding tax. However, there are certain nuances that the CBDT has not touched upon while issuing the guidelines, such as:  
  1. The guidelines prescribe withholding that has to be done irrespective of the fact under which section such income is offered to tax by the recipient. Where benefit/perquisite is covered under the provisions of Section 41(1) of the Act, there will be practical difficulty being faced in the hands of the benefit/ perquisite provider since he will not have the mode to discharge such liability and could result in blocking his working capital.
  2. In the case of free items/products, even though the benefit or perquisite is eventually enjoyed by the employee/director, it may lead to additional cash out-flow in the hands of the recipient company since the company will have to gross up the TDS on such perquisite which is enjoyed by its employee/director.
  3. In case of out-of-pocket expenses, if the invoice is not in the company’s name, which has to bear the expenses eventually, then it will be treated as a perquisite in the hands of the service provider. This will lead to certain issues, for example, when an audit team goes for a statutory audit and the flights/hotels are booked by the CA firm and then reimbursed by the client. In such a case, it will be treated as perquisite for the CA firm. Here though, the CA firm has not earned any income, but it will have to pay tax on the amount of reimbursement received from its client.
  4. The person providing the benefit has to collect the advance tax challan from the recipient. This will also lead to administrative challenges for some persons like distributors who distribute the goods for many manufacturers. Every time he receives a benefit, he will have to pay an advance tax challan and share the same with the provider of the benefit. This would also impact various hospitals that receive various free samples from various pharma companies on a recurring basis. This would also increase the compliance burden on the recipient.
In a nutshell, though the clarification from CBDT on certain aspects is welcomed, there would be another series of transactions that would face genuine problems while executing the provisions of Section 194R of the Act and only time will tell the fate of such cases!
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