Come July 1, companies providing incentives such as foreign trips, cars, gold coins or gift items exceeding ₹20,000 to their dealers and distributors, will be required to deduct tax at the rate of 10 per cent. A new section inserted in the Finance Act 2022 has made this possible.

The section 194R prescribes Tax Deducted at Source (TDS) by a 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. This has been done to widen the tax base.

The Budget document says there is provision under the Income Tax Act regarding value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession to be charged as business income in the hands of the recipient. Till now recipients of such incentives did not report these perks in their return of income as it was not spelt out in black and white. Tax officials have now removed this ambiguity.  

Marketing expenses

Aakanksha Goel, Direct Tax Partner with T R Chadha & Co LLP, points out that as a corporate practice, companies incur huge amounts of marketing expenditure to boost their sales. Such marketing expenses are in the form of benefits or perquisites to their dealers/distributors on meeting certain targets and thresholds. Companies claim deduction of such marketing expenditure in their Income Tax Returns.

“Since such benefits are in kind, dealers/distributors generally don’t disclose such benefits in their Income Tax Returns leading to tax evasion,” she said. 

But now, she says, “It may be relevant to note that the companies are also required to check the compliance of Section 206AB before deducting TDS u/s 194R. Accordingly, where the name of any dealer or distributor appearing in the list of specified persons u/s 206AB, TDS shall be deducted at a higher rate of 20 per cent instead of 10 per cent,” she advised.

Om Rajpurohit- Director (Corporate & International Taxation) with AMRG & Associates says this provision will be applicable only if it crosses the threshold monetary limit of ₹20,000 during the year. “Simultaneously, in case of Individual & HUF, where the total sales/ gross receipts or turnover does not exceed ₹1 crore in the case of business and ₹50 lakh in the case of profession during previous financial year, then also provisions of this Section will not be applicable,” he said.

Compliance burden

Indruj Singh Rai, Partner with Khaitan & Co, feels such provisions are likely to add to the compliance burden.

 “The entity distributing promotional items will have to collect cash from the recipient to deposit taxes with the government, which will add to the compliance burden,” he said.

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