TDS on expenses reimbursed to a service provider in light of Sec 194R-TDS

 

What is Sec 194R?

1. Section 194R, which came into effect on July 1, 2022, brought a significant change in the treatment of benefits or perquisites arising from business or profession.

2. It mandates that any person providing a benefit or perquisite to a resident must deduct tax at 10% of the value of such benefit or perquisite.

TDS on reimbursements:

1. As per Circular No 12 of 2022, any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession.

2. So, for example, consider a situation where, a service provider needs to travel to different parts of India while providing services to the service recipient and incurs expenses for that purpose. Now, if these travel expenses are reimbursed by the recipient, the recipient will have to pay TDS of 10% on the value of the reimbursement.

3. Now consider a situation where the invoice of the expense made is in the name of the service recipient. In that case, there will not be any TDS u/s 194R.

4. Circular No. 18 of 2022 dated 13-09-2022 further clarifies that if reimbursement expenses are already part of the consideration in the bill on which tax is deducted U/S 194C, 194J or any other TDS section, except section 194R, there will not be further liability for tax deduction under section 194R of the Act.

5. So if out of pocket expenses are mentioned in the same invoice as the main supply of goods or services, TDS U/S 194R will not be applicable. Also, if the invoice for reimbursement expenses are in the name of the recipient of services, TDS U/S 194R will not be applicable.