On September 13th, 2022, the Central Board of Direct Taxes issued a circular describing guidelines for the “removal of difficulties” under sub-section (2) of section 194R of the Income-tax Act, 1961. As clarified in the circular, this Circular is only for removing provisions of Section 194R of the Act without affecting the taxability of income in a person's hands.

So, what is Section 194R of the Income-tax Act, 1961?

Section 194R of the Income Tax Act, 1961, pertains to the deduction of tax on benefits or perquisites in respect of businesses or professions. Businesses, companies, or entities often extend multiple types of benefits and perquisites to their distributors, channel partners, agents, or dealers to incentivise and motivate them to promote further growth of a business.

A few examples would include travel packages, gift cards or vouchers, products under incentive schemes, or the usage of business assets, among others.

Section 194R, introduced by the Finance Act, 2022 w-e-f 1st July 2022, states that,

   1. TDS @10% must be deducted on the value/aggregate value of any benefit or perquisite provided to a resident during the financial year.

   2. Tax to be deducted before providing such benefit or perquisite.

   3. Such benefit or perquisite may or may not be convertible into money, but it must arise from the resident's business/profession.

   4. No TDS is required if the value or aggregate value of the benefit or perquisite to a resident does not exceed Rs. 20,000 during the financial year.

   5. Responsibility of TDS does not apply to an individual or HUF providing the benefit or perquisite if Gross – Sales / Turnover / Receipts for the previous financial year should

not exceed

      a) Rs. 1 crore from Business;

      b) Rs. 50 Lakh from Profession

Guidelines for the removal of difficulties stated in Circular 18 of 2022, issued by CBDT:

• •  Under Section 194R of the Income Tax Act 1961, no TDS on one-time loan settlements with borrowers or loan waivers by:
  
  Public Financial Institution, Scheduled Bank, Co-operative Bank, Primary Co­operative Agricultural and Rural Development Bank, State Financial Corporation, State Industrial Investment Corporation, Deposit-taking NBFC, Systemically Important (SI) Non-deposit taking NBFC, Housing Finance Company providing long-term finance for construction or purchase of residential houses in India, Asset Reconstruction Companies.

• •  Under section 194R, no TDS on the issue of Bonus or Right shares to all shareholders by a company in which the public is substantially interested.

• •  Under Section 194R, no TDS on Expenses incurred by Pure Agent and reimbursed by the recipient would not be treated as income, if:

        a. Supplier acts as Pure Agent on behalf of the recipient and makes payment to the third party on the authorisation of the recipient.

        b. Payment made by Pure Agent on behalf of the recipient to a third party is separately indicated in the invoice issued by the Pure Agent to the recipient.

        c. Supplies procured by Pure Agent from the third party are in addition to its own supplies.

        d. GST input credit is claimed by the recipient.

• •  Under Section 194R, no TDS on Out-of-pocket expenses included in the bill and Tax deducted under Section 194J on the entire amount of the bill including the Out-of-pocket expenses.

• •   Under Section 194R, no TDS on Benefit or Perquisite is provided in a group activity if;

        a. It is difficult to match the benefit or perquisite with each participant separately,

        b. Such expense is not claimed as a deductible expenditure from total income under Income Tax, by the person incurring such expense.

• •   Under section 194R, Depreciation on a Car received as a gift is available to the recipient, if;

        a. If the TDS is deducted by the person giving the gift.

        b. Benefit value is included in the total income offered to tax by the recipient.

• •   Section 194R is not applicable on benefit or perquisite provided by;

        a. An organisation in the scope of The United Nations (Privileges and Immunity Act) 1947.

        b. International organisations with income exemption as per the specific act of parliament.

        c. An Embassy, High Commission, Legation, Commission, Consulate and Trade representation of a foreign state.

As stated earlier, these clarifications are only for the purposes of section 194R of the Act and shall not be applicable to any other Sections under Income Tax Act,1961.