Gearing up for TDS on perks under Section 194R

The concept of perquisite is not new, especially for people earning income from salaries. However, recently the meaning of the term ‘perquisite’ is being re-examined in light of Section 194R of the Income tax Act, 1961 (Act), which will come into effect from July 1, 2022.

The new section mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source at 10 per cent of the aggregate of value of such benefit or perquisite, before providing such benefit or perquisite. This deduction is not required to be made, if the aggregate value of the benefit or perquisite provided to the resident during the financial year does not exceed twenty thousand rupees.

Leaving no stone unturned, in its attempt to widen and deepen the tax base, CBDT has issued clarification with illustrative examples to enable seamless application of this section. Based on the clarifications issued by CBDT, we have analysed below some of the possible transactions and the applicability under section 194R of the Act.

Payment of fees for technical services in kind

These refer to income earned by a person which is in the nature of fees for technical services. Based on the circular, one can take a view that now the TDS rate applicable on such fees, will depend on the mode of payment. Where payment is made in cash, TDS will be applicable under section 194J of the Act at the rate of 2 per cent. However, where payments are received in kind , such payments will attract TDS under section 194R of the Act at 10 per cent of the value of such ‘perquisite or benefit’.

Reimbursement of out-of-pocket expense

Reimbursement refers to the repayment of the amount incurred by one person on behalf of another person. These include expenses such as travel, stay, food etc. and generally, are claimed as out-of-pocket expenses (OPE) by the service provider. As per the existing provisions, TDS would be applicable on the OPE included in the invoice raised by the service provider.

However, as per the clarification, now TDS will be required to be done under section 194R of the Act even on payment made directly by the service recipient (and not reimbursed) for expenses where the invoice for the expense is raised in the name of the service provider.

Products provided for rendering service

The circular has clarified whether products provided to an artist, influencer for e.g. outfits, cosmetics mobile etc. for promotion or marketing would qualify as a perquisite. As per the circular, whether this is a benefit or perquisite under section 194R of the Act, will depend upon the facts of the case. If the product is returned to the manufacturing company after using it for the purpose of rendering service, then it will not be treated as a benefit or perquisite.

However, if the product is retained then it will be considered as a benefit or perquisite and tax would be required to be deducted under section 194R of the Act. However, the circular in silent on the valuation of this products considering they are used/ not new for the business of promotion and marketing.

Capital assets provided for rendering services

In the clarifications, the CBDT has discussed a case where a car was given to an assessee by his disciple, who had been benefitted from his preaching. In the circular CBDT explains that the value of car was held to be taxable by the Allahabad High Court, in the hands of the assessee being a receipt from the exercise of the vocation carried on by him.

Based on similar judgements, CBDT has stated that the service recipient is required to deduct tax under section 194R of the Act in all cases where benefit or perquisite, including capital assets, is provided. However, an issue that arises here is what constitutes “consideration in kind” and what is a “gift” and a “donation”.

Gifts provided on occasions

In India, it is customary to exchange gifts among business associates especially during the festival of Diwali. Notably, the clarifications issued by CBDT are silent on the question of gifts. In the absence of any clarification, the interpretation would fall on the shoulders of the tax officials and where nexus is established between the value of the gift and business or profession of the service provider, then gifts may fall under the purview of section 194R of the Act. In other words, this would depend on the facts of each case and whether such gifts are in lieu of any perquisite or benefit.

The clarification provided by CBDT tries to bring forth the intention of the law that can be applied to examine the applicability of TDS in case of transactions, other than the above. On one hand, it does increase the compliance burden of the provider of benefit or perquisite. But on the other, by placing the obligations on the provider, it ensures that every benefit is tracked and hopefully plug tax leakages.

The author is Partner, Nangia Andersen LLP. With inputs from Neetu Brahma

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