Taxation of Benefits & Perquisite received by the Taxpayers engaged in Business or Profession

The definition of “Income” as given in the Income Tax Law is very wide so as to include almost everything in its net. Despite this, there are various incomes which remain untaxed due to non-availability of audit trail. To plug the tax leakages, some provisions are added in each and every budget. Budget 2022 now has added a provision to track the taxation of benefits or perquisites received by the taxpayers engaged in the business or profession.

Taxation of Benefit or Perquisite:

a)Salaried Taxpayers:

Presently, the TDS provision is applicable only on the benefit or perquisite received by the Salaried Taxpayers from the employer. Any perquisite like rent-free accommodation, free car, gifts, other emoluments etc employee received by the employee from employer is taxable u/s 17 and is subject to TDS by the employer.

b)Taxpayers in Business or Profession:
Taxpayers engaged in the business or profession also often receive various benefits or perquisites during the course of business. For example,

a) An insurance company decided to offer LED TV of Rs. 65,000/- to an agent who makes insurance premium login of say Rs. 5 Lakh in a month.

b) A home appliances company decided to offer the free tour to Bangkok for the dealer who makes the purchases of say Rs. 15 Lakh in festival time.

c) A cement company decided to offer 2 Gold coins to its dealers if they make purchases of an amount exceeding Rs. 50 Lakh per month.

At present, all such income is liable to be taxed in the hands of the recipient u/s 28(iv) of the Income Tax Act- 1961. However, all such income mostly was not getting taxed as it was not in monetary forms. On the one hand, the person providing such benefit or perquisite was able to get the deduction of the expenses incurred over it, the recipient was not paying the tax as it was unaccounted, unrecorded or unnoticed.

To plug the tax leakages, a new TDS provision by way of section 194R is proposed to be introduced in the Income Tax Act-1961. Now, all such benefits & perquisites will be subject to the TDS provision on the basis of its market value. As a result, the company offering LED TV, Gold Coin or foreign tour package, etc will be required to do the TDS and the same would now be reflected in the Annual Information Statement (AIS, formerly Form No. 26AS) of the recipient. In short, the income, which was taxable earlier but was not getting taxed for any reason whatsoever, will be in the net of the taxmen.  Let us know about the TDS provision as contained in Section 194R:

1. Applicability:

Section 28(iv) aims at taxing fringe benefits that are availed in addition to consideration earned in carrying out a Business or Profession. In short, if the consideration is circumvented & paid in the form of benefit or perquisite, section 194R will be attracted.

2. TDS Rate:
All benefit or perquisite will be liable for TDS @ 10% of the market value of the benefit or perquisite.

3. Amount on which TDS is required?:
TDS would be attracted only if the aggregate value of such benefits exceeds Rs. 20,000/- during the financial year. In short, if the value or aggregate value of the benefit or perquisite paid or likely to be paid to a resident does not exceed Rs. 20,000/-, no tax would be required.

4. Who is liable to do TDS:
The person providing benefit or perquisites is liable to comply with the TDS provision. All such persons who are required to comply with other TDS provisions (like Payment of interest u/s 194A, Payment of Brokerage u/s 194H, etc) only will be required to comply with the TDS provision u/s 194R.

5. Nexus with Business is Necessary:
TDS is applicable only on the benefit or perquisite received during the course of business or profession. In short, there must exist a nexus between the business of the recipient & benefits provided therein. If the gold coin or foreign tour package is offered by the company directly to its user/customer then it may not be subject to the TDS.

6. Pure money payment transactions:
Section 194R provides for TDS on benefit or perquisite whether convertible into money or not. It means that once the benefit itself is provided in the form of money then the TDS provision is not attracted. Hon’ble Supreme Court in the case of Mahindra & Mahindra Ltd (2018) 255 Taxman 305 has held that the provisions of section 28(iv) can be invoked if the benefit is received in any form other than in the shape of money.

7. Sale at a Reduced Rate:
Provision of section 28(iv) is attracted if some benefit or perquisite is offered. It may not be applicable if the goods or services are sold at a lesser price. In short, section 28(iv) is not attracted on hypothetical income which can be said to accrue on purchase at a lower price. In my view, TDS provision will not be applicable in such cases.

8. Payment of TDS if the benefit is given in Kind only:
If the benefit or perquisite is wholly in kind or partly in cash and partly in kind & cash is not sufficient to meet the liability of TDS then also the person responsible for providing such benefit or perquisite shall have to ensure that the tax has been paid in respect of such benefit or perquisite

Conclusion:

Section 194R is surely going to plug the tax leakages in the system. More particularly, insurance agents, financial advisors, dealers of companies, etc were getting lots of non-monetary benefits and perquisite by way of gold coin, tours, gifts etc & all such persons are sure to witness rise in their tax liability.

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