Income tax and GST implication for Perquisites or benefit under section 194R of Income tax Act

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By CA Jagrut Shah,

Background

Before introduced this provision under Income Tax Act benefits or perquisites are taxable in hands of recipient as per section 28(iv) of Income Tax Act. In a business and profession providing of benefits or perquisites likes gifts, travel trip etc. which are old tradition in a marketing strategy by this transaction provider claims such expenditure as sales promotion, business promotion from their profits. As there is lack of tracking and/or measuring mechanism, the most of the recipients are failed to report their benefits or perquisites in their income tax return. So that government is unable to collect income tax from it, to curb this loophole government introduced this provision 194R in Finance Act 2022.

Section 194R as per Income tax Act 1961

With effect from 01^st July 2022 Section 194R is applicable by income tax act. As per provision of 194R provider has to deducted Tax deducted at source @ 10% in respect of providing to resident any benefit or perquisites arising from business or the exercise of a profession, if the amount of benefit or perquisites exceed Rs. 20000 in financial year. Provision 194R shall apply to all person responsible to provide benefit or perquisites other than a person being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed Rs.1cr. in case of business or Rs. 50 lakhs in case of profession, during the financial year immediately preceding the financial year.

In nutshell any benefit or perquisites whether converted in to money or not is provided to distributer, agents and dealers which arise from the business or profession TDS is deducted on such value of benefit or perquisites. Perquisites or benefits may be in Gold, Electronic Equipment, Mobile Phone, Travel trips, Vehicle etc.

Valuation of Benefit or perquisites

Circular No. 12/2022 of the CBDT has clarified the valuation of benefit or perquisites would be based on fair market value of the benefit or perquisite except in following cases

Purchase price shall be the value of the benefit or perquisites where the provider has purchased it before providing it to the recipient and

Price charges from the customer shall be the value of the benefit or perquisites where the provider has manufactured such benefit or perquisites.

Under circular further clarified that GST amount will not be included for the purpose of valuation of benefits or perquisites for the TDS under section 194R of the Income Tax Act.

Deduction of TDS Liability in the hands of provider of benefits or perquisites

Any provider provides any benefits or perquisites which is arisen from the course of business or profession, Provider has to deduct TDS from the value of such benefits or perquisites as per section 194R of the income tax Act, at the time of providing of such benefits or perquisites.

Income Tax Liability in the hands of recipient on receipt of benefit or perquisites

Any recipient received benefit or perquisites is taxable under section 28(iv) of the income tax act. As section 28(iv) provides the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of profession is taxable under profits and gain from business and profession.

The required condition for income taxable under section 28(iv) of the Income Tax Act

The benefit or perquisites arisen from course of business or profession of assessee.
The benefit or perquisites are convertible into money or not.
Direct connection between business or profession of assessee with the benefit or perquisites received.

It means any dealer received in form of incentive/gift from the company, such incentive/gift has direct connection with business of dealer by completing of required target of sales of such company’s products for which dealer is eligible to get incentive.

Reversal of Input Tax Credit by provider for providing benefits or perquisites

Benefits or perquisites provided in nature of kind or services to recipient, such benefits are purchased from open market or may be manufactured by provider himself. By distribution of this benefits/incentive the provider is not entitled to avail and utilised input tax credit on such purchases or on raw material which used for production of goods as per section 17(5)h of the Goods and Service tax act.

As per section 17(5)h of the GST Act provides input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed by way of gift or free samples. So, in the case of benefits or perquisites are provided to recipient by way of gift nothing amount is collected from recipient for such benefits. Then Input tax credit shall be reversed when provider is provided benefits or perquisites to recipient by way of gift.

GST liability in the hands of recipient

Any recipient received benefits or perquisites is liable to pay GST on value of such benefits or perquisites as per section 7 read with clause 5(e) of Schedule II of the Goods and Service Tax Act 2017.

As provided in clause 1(A) of section 7 where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in schedule II. In schedule II clause 5(e) provided agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

It means any benefits or perquisites is received by recipient which is arise from business or profession are included in outward supply of service in the hands of recipient, as agreeing to do an act for the provider of benefits or perquisites. So that such value of benefits or perquisites is include in outward supply for leavy and collection, recipient is liable to pay GST on such value of benefits or perquisites. Value of benefits or perquisites are calculated as per Rule 27 of the Goods and Service Tax Act 2017.

Let us understand this provision by example A ltd. has provided benefits as electronic Gadget value of gadget by Rs.100000/- to its dealer ABC Traders for achieving sales target for the year.

A ltd. has to deduct TDS u/s 194R @ 10% on value of Rs. 100000/- i.e., Rs. 10000/- at the time of providing benefit to ABC Traders. A ltd. has claimed this expenditure of Rs. 100000/- like sales promotion or business promotion exp., Incentive to Dealers exp. etc. in its profit and loss account.
ABC traders received electronic gadget value by Rs. 100000/- from A ltd. By this transaction ABC traders has to mention this value of benefit in his income tax return and same is treated as taxable under business income. If ABC traders is taxable by higher rate of income tax i.e., 30% ABC traders has to pay Rs. 30000/- income tax on value of benefit received.
If the A ltd. has purchased electronic gadgets from open market for distributing to its dealers, then A ltd. has to reversed input tax credit which is mention in the invoice of electronic gadgets. In above example suppose Electronic Gadget is taxable @ 18% so input tax credit on gadgets is Rs. 18000/- reversed by A ltd.
ABC traders credited this benefit value of Rs. 100000/- in his profit and loss account same is treated as outward supply of service by received benefit for agreeing to do an act for A ltd. by completing of sales target for the year. ABC traders has to discharged his GST liability @ 18 % on value of benefit received i.e., to pay 18000/- GST on it.

Conclusion

After introduced this section 194R of the income tax act government is easily to collect income tax and Goods and service tax from the both the parties. From the above mention example Government collect 30000/- by way of income tax from recipient and Rs. 36000/- by way of Goods and Service tax from both the parties i.e., 18000/- from each party. In nutshell from the above example government collect Rs. 66000/- by way of GST and Income tax from the value of benefit and perquisites of Rs. 100000/-

Disclaimer

These views are personal opinion only. Any opinion expressed in this article is only for academic knowledge sharing, it is not consider for any professional advice.