Section 194R of Income Tax Act, 1961 (‘the Act’) – effective from 01 July 2022

Any person responsible for providing any benefit or perquisite in cash or kind to a resident, is required to deduct tax at the rate of 10% of the value or aggregate of value of such benefit or perquisite.

Exceptions to above section:

1. The aggregate value of benefits or perquisites does not exceed INR 20,000;

2. A person providing the benefit being Individual or a HUF whose aggregate turnover from business does not exceed INR 1 crore or Income from profession does not exceed INR 50 lakhs in the previous year;

3. The benefit or perquisite is being provided to a Government entity;

4. Benefits provided by organization of United Nations (as defined under the Act), international organization whose income is exempt under specific act of Parliament, an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign state.

Guidelines issued by Central Board of Direct Taxes (CBDT)

• The deductor is not required to check whether the amount of benefit/perquisite provided is taxable in the hands of recipient or the section under which it is taxable;

• The threshold limit of INR 20,000 will be applicable from 1st April 2022. However, no tax to be deducted on the benefit provided before 01 July 2022;

• Tax to be deducted on net basis after excluding Good and Service Tax (GST)/other charges as levied on such benefit/perquisite;

• Tax is required to be deducted even if the benefit/perquisite provided is in the form of a capital asset like car, land, etc.;

• Tax to be deducted in the hands of the recipient entity irrespective of its usage by the owner/director/employee/relatives who in their individual capacity may not be carrying any business or profession;

• In case of sale discount/cash discount/rebates allowed to customers – No tax to be deducted. In case of free samples or incentives being provided - Tax to be deducted;

• For the purpose of valuation of benefit/perquisites provided, Fair Market Value (FMV) of such benefit shall be considered as value of such benefit/perquisites except in the following cases:

  • In case if the provider purchases such benefit/perquisite – Purchase price;

  • In case if the provider manufactures such benefit/perquisite – Price charged to its customers;

• In case of benefit in kind or partly in cash and partly in kind (if the amount of cash being insufficient to pay the tax liability) then:

  • Deductor to ensure that the recipient has paid such taxes;

  • Recipient to pay such taxes in the form of an advance tax;

  • Deductor may rely on a declaration along advance tax payment challan;

  • Deductor to disclose the details in the Form 26Q;

  • Alternatively, the deductor may deduct and pay such taxes to the government. In such a case the said taxes paid by him will be added as a benefit in the hands of the recipient.

• In case of social media influencers, if the product is retained by the influencer, then the same will be considered as benefit/perquisite in their hands and hence tax is required to be deducted;

• In case of reimbursement of the Out-of-Pocket Expenses (OPE) by service recipient to the service provider for the expenses incurred by him:

  • If the invoice is in the name of ultimate service recipient – No tax to be deducted;

  • If the invoice is in the name of service provider – recipient to deduct taxes on such reimbursements

• In case of a person acting as a ‘Pure Agent’ (who satisfies all the conditions as provided under the Act), reimbursement of expenses by recipient to the agent would not be treated as a benefit/perquisite in the hands of agent;

• If the tax is being deducted on reimbursement of OPE under any other relevant provisions of the Act, no tax is required to be deducted under section 194R;

• Expenses incurred in relation to the business conference held with prime object to educate the dealers/customers about the product - not to be treated as benefits/perquisite for the purpose section 194R. Except in the following cases:

  • Conference in the nature of incentives/benefits to select dealer/customers achieving specified targets;

  • Expense attributable to leisure trip or leisure component;

  • Expenditure incurred for family members accompanying the dealer/customer to business conference;

  • Expenditure on participants of business conference for days which are on account of prior stay or overstay beyond the dates of such conference (excluding day immediately prior to the actual start date and day immediately following the actual end date of conference).

• On issuance of bonus or right shares issued by company in which public are substantially interested as defined under the Act – No tax to be deducted