In the Finance Act, 2022, a new TDS section 194R has been inserted in the Income tax Act, 1961 which has been made applicable from 01.07.2022.

The key points of Section 194R of the Income tax Act, 1961 which are as follows:

1.  Section 194R states that a person who is responsible for providing any benefit or perquisite to a resident, shall deduct TDS @ 10% of the value of benefit and perquisite provided.

2. The benefit or perquisite provided may or may not be convertible into money but should arise either from carrying out of business or from profession.

3. The liability of deduction of TDS can only be arise when value of benefit or perquisite provided during the financial year exceeds Rs.20,000/-

4. The liability of deduction of TDS can only be arise in case of individual and HUF when total receipts/total turnover/total sales exceeds Rs. 1 Crore in case of business and Rs. 50 Lakhs in case of profession during the financial year immediately preceding the financial year in which such benefit or perquisite is provided.

5. Person providing benefit or perquisite shall deduct TDS irrespective of the benefit or perquisite provided is in the form of capital assets or the benefit or perquisite is taxable in the hands of the recipient under clause iv of section 28 of the Income Tax Act, 1961.

On 16^th July, 2022 vide circular no. 12 of 2022, CBDT issued guidelines for removal of difficulties u/s 194R of the Income Tax Act, 1961. In the guidelines issued by the CBDT, CBDT citied judicial pronouncements and 10 tier question answer mode to enforce TDS on benefit or perquisite provided.

In the circular CBDT, stated that the deductor have to deduct the TDS irrespective of whether the amount of benefit or perquisite providing would be taxable in the hands of the recipient under clause (iv) of section 28 of the Income Tax Act, 1961.

The relevant extract of the same is reproduced below:

Question 1. Is it necessary that the person providing benefit or perquisite needs to check if the amount is taxable under clause (iv) of section 28 of the Act, before deducting tax under section 194R of the Act?

Answer: No. The deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under clause (iv) of section 28 of the Act. The amount could be taxable under any other section like section 41(1) etc. Section 194R of the Act casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source @ 10%. There is no further requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable.

Whereas, the aforesaid statement is contradictory to the explanatory memorandum to the Finance Bill 2022, in which it has been stated that the benefit or perquisite covered under clause (iv) of section 28 of the Act and shall arise from business or profession, whether convertible into money or not shall be chargeable in the hands of the recipient.

Relevant extract of the same is reproduced below:

TDS on benefit or perquisite of a business or profession

As per clause (iv) of section 28 of the Act, 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. However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income.

Accordingly, in order to widen and deepen the tax base, it is proposed to insert a new section 194R to the Act to provide that the person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from carrying out of a business or exercising 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. For the purpose of this section, the expression ‘person responsible for providing’ has been proposed to mean a person providing such benefit or perquisite or in case of a company, the company itself including the principal officer thereof.

Further, 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 of perquisite shall, before releasing the benefit or perquisite, ensure that tax has been paid in respect of the benefit or perquisite.

No tax is to be deducted if the value or aggregate value of the benefit or perquisite paid or likely to be paid to a resident does not exceed twenty thousand rupees during the financial year.

Further, the provisions of the said section shall not apply to 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.

This amendment will take effect from 1 st July, 2022.

So both the statements do not go hand in hand as on one hand in the memorandum it is stated that such benefit or perquisite must be chargeable in hands of the recipient and on the other hand it is stated that deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under clause (iv) of section 28 of the Act.

There are certain examples incorporated in the guidelines issued by board to define various kinds of benefit or perquisite.

1. Incentives in the form of cash or kind such as car, TV, compute, mobile phone, etc.

2. Sponsoring trip for recipient or his or her relatives.

3. Providing free tickets of any event.

4. Free sample distribution, etc.

If we see all the aforesaid benefits or perquisite either they are inadmissible or not admissible deduction under Income Tax Act in computing the business income. Therefore, deducting TDS @ 10% would lead to double taxation.

The CBDT through its circular also clarified that on sales discount, cash discount or rebate no such requirement to deduct TDS. However the same shall not be extended to other benefits. Further, in regard to the valuation of the benefit or perquisite, it would be based on fair market value of the benefit of perquisite.

Moreover, the most important how to determine the threshold limit of Rs. 20000/- of the total value of benefit or perquisite provided in the FY 2022-23.

The CBDT vide Question No. 10 of circular No. 12 of 2022 has clarified that:

The calculation of value of benefit or perquisite shall be counted from 01.04.2022. Hence, if the aggregate value of the benefit or perquisite provided or likely to be provided to a resident exceeds Rs. 20000/- during the financial year, the provision of section 194R shall apply on the benefit or perquisite provided on or after July, 2022.

So the benefit or perquisite which has been provided on or before 30^th June 2022 would not be subjected to tax deduction under section 194R of the Income tax Act, 1961.