A Complete Guide on Section 194R

Finance Ministry announced section 194R in the recent 2022 Budget to be inserted from 1st April 2022 and in effect from 1st July 2022. Here is A Complete Guide on Section 194R for you to make use of it.

Section 28(iv) of the Income Tax Act, 1961 provides that the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as Business Income in the hands of the recipient of such benefit or perquisite.

Section 194R states that,

“Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite. Provided that in a case where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite, the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or perquisite. Provided further that the provisions of this section shall not apply in case of a resident where the value or aggregate of value of the benefit or perquisite provided or likely to be provided to such resident during the financial year does not exceed twenty thousand rupees. Provided also that the provisions of this section shall not apply to a person being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided by such person.”

Inserted and In Effect From

This section has been announced in Budget 2022 and inserted from 1^st

April 2022 and is in effect from 1^st July 2022.

Responsible Party to Deduct Tax at Source

The liability to deduct tax at source under this section is on body corporates, partnership firms, AOP and BOI providing such benefit or perquisite.

Also, individuals and HUF having turnover over and above 1 crores or receipts over and above 50 lacs in case of professional, will be liable to deduct TDS under this section.

Rate and Time

TDS is to be deducted at 10% on the value or aggregate of values of such benefit or perquisite exceeding Rs 20,000/-

TDS to be deducted before providing such benefit or perquisite.

Recently, Central Board of Direct Taxes (CBDT) has issued a circular providing guidelines and addressing the issues of Section 194R, majorly regarding inclusion and exclusion of benefits or perquisites that will come in the purview of this newly inserted section. We have addressed the few key points here below.

Inclusions in the definition of ‘Perquisites’

Amount paid as an earnest money on purchase of land on the date of agreement and the land is not given to the buyer but the development of land has been started.
The amount representing principal loan waived by bank under one time settlement scheme relating to value of any benefit or perquisite, arising from business or exercise of profession.
Value of rent-free accommodation, furniture and fixtures given to director.
Where a car was given to an assessee by his disciple, who had been benefited from his preaching.
In terms of an agreement with the promoters, shares were allotted to the director of the company.
Value of gift of land held as a receipt in carrying on of his vocation.
If the product given o a social media influencer by the manufacturing company is retained after using for the purpose of rendering services.
Any expenditure which is the liability of a person carrying out business or profession met by the other person provided by the second person to the first person in the course of business/profession.

Exclusions from the definition of ‘Perquisites’

The benefits or perquisite u/s 17(2), under the head Salary income, paid or payable by the employer to employees.
such gifts, perks or benefits provided on some special occasions like festivals (Example – Diwali sweets), marriage occasions, etc. may not liable for tax deduction at source, as section 194R contemplates to cover only those benefits or perquisites, which arise out of business or profession.
On sales discount, cash discount and rebates allowed to customers.

Other points regarding Perquisites

Expression used “whether convertible into money or not” would mean that benefit, which is provided will be liable for TDS, irrespective of whether the benefit is capable of conversion into money form or not.

Deductor is not required to verify whether the amount of benefit is chargeable to Income Tax u/s 28(iv) of the Act in the hands of recipient.

Valuation of Benefit/Perquisite

The valuation would be based on fair market value of the benefit or perquisite except in following cases

The provider has purchased the benefit/perquisite before providing it to the recipient. In that case the purchase price shall be the value for such benefit/perquisite.
The provider manufactures such items given as benefit/perquisite, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.

It is further clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R of the Act.

In valuation of amount of benefits/perquisite, value or aggregate of values of such benefits/perquisites must include the amount up to 30^th June 2022 but this amount would not be subjected to TDS u/s 194R.