Businesses give multiple gifts/perks/benefits to their business partners (for example corporate gifts on festivals etc). It was observed by the department, that such business partners do not show these benefits as a business receipt while filing their income tax return on the other hand businesses were claiming it as business expenses. So, to track such undeclared income a new TDS section- section 194R was introduced which was effective from 1st July 2022. This means that from now onwards, TDS will be deducted by businesses on issuing benefits or perquisites (in cash or kind) to their agent or dealer, or distributor.
Let’s understand practically with the help of an example,
For instance, an electronic manufacturing company gives non-monetary benefits like TV, fridge, or any electronic items (worth Rs. 1,20,000), to their distributors/agents if they achieve particular targets.
Earlier what happens the electronic manufacturing company would report it as a business expense, however, the business, that got such benefits did not report it as income on its ITR because it was in a kind. So, from the government’s end, it’s a leakage here, which would impact the tax revenues.
In such cases, TDS u/s 194R will come into the picture, where, an electronic manufacturing company has to deduct the 10% TDS on 1,20,000. So, here, now the company has to bare the 12000 Rs. extra. Either distributor can give cash to the benefit-giving company to meet the TDS liability.
Applicability of TDS under section 194R
- It is specified that for section 194R, 10% TDS shall be deducted by any business giving benefit or perquisite, exceeding Rs. 20,000 in value, in a year, to a resident, of each recipient.
- It includes monetary and non-monetary gifts, perks, or benefits.
- Are there any exceptions to this section? Yes, if such gifts, perks, or benefits are provided by their employer to employees or other than business-related benefits like gifts given on marriage occasions, etc., then may not be liable for tax deduction at source, as section 194R considers only those benefits or perquisites arising from business or profession.
- Furthermore, Individuals/HUFs, are not allowed to deduct TDS if their turnover in the previous financial year did not exceed INR 1 crore in the case of a business or INR 50 lakh in the case of a profession.
The TDS will not be applicable if there is no business relationship.
You can read more about TDS under Section 194R: Benefit or Perquisite in respect of Business/ Profession here.