No more freebies! Influencers, music bands, doctors liable to 10% TDS

Ensure value of goods doesn't exceed Rs 20,000 to avoid TDS

The Central Board of Direct Taxes (CBDT) recently issued guidelines on how the new tax deducted at source (TDS) provisions regarding benefits received in a business or profession are to be applied. These provisions will come into effect from July 1. The Union Budget had introduced them by inserting a new Section 194R into the Income-Tax (I-T) Act, 1961.

According to it, TDS of 10 per cent must be deducted by any person who provides benefits or perquisites exceeding Rs 20,000 in a year to a resident, arising from the latter’s business or profession. This provision won’t apply to individuals or Hindu Undivided Families who don’t, in the preceding financial year, have total sales, gross receipts or turnover above Rs 1 crore in case of a business, and Rs 50 lakh in case of a profession.

Who will be affected?

This provision is likely to affect businesses that engage dealers and franchisers and provide them benefits based on their performance, or for the purpose of marketing.  

Soayib Qureshi, associate partner, PSL Advocates & Solicitors, says, “It will also affect social media influencers, artists, bands, etc who are provided products for the purpose of marketing.”

Some examples of benefits or perquisites taxable under this provision include dealer or business conference, expenses incurred on leisure trips, incentives in cash or kind given to dealers based on target completion, loyalty rewards, gifts given as incentives, sponsored insurance, sponsored family trips, benefits in kind to social media influencers and doctors, etc.

Regarding social influencers, Aditya Chopra, managing partner, Victoriam Legalis-Advocates and Solicitors, says, “Social media influencers will be liable to pay TDS if the equipment given to them as part of a company’s marketing efforts is retained by them. It will not apply if the equipment is returned.”

Benefits in cash and kind covered

Section 194R applies to benefits or perquisites provided in cash, kind, or partly in cash and partly in kind.

Deepak Jain, chief executive, TaxManager, says, “If the benefit has been provided in kind, the deductor should ensure the recipient pays advance tax on the value of the benefit. Otherwise, the benefits provider may pay TDS to the I-T authorities, but that TDS may also be considered a part of the benefit.”

If recipient not liable to pay tax

It doesn’t matter whether the beneficiary is liable to pay tax on the benefit.  

Naveen Wadhwa, deputy general manager, Taxmann, says, “Section 194R casts an obligation on the person responsible for providing any benefit or perquisite to a resident to deduct TDS. The deductor is not required to check whether the amount is taxable in the hands of the recipient, or the Section under which it is taxable.”

The exclusions

Some benefits don’t fall under the ambit of Section 194R.
 

“This provision excludes benefits given to employees under Section 17(2) of the Act under salary head, such as rent-free accommodation; amenities granted free-of-cost to employees; sum paid by an employer through a fund; and payment for medical treatment of employee or his family in certain cases,” says Qureshi.

What you should do

Social media influencers should check with their tax consultants whether the incentive or product given to them for promotion is taxable. They should also return the product given to them for the purpose of promotion.

Section 194R also applies to the distribution of free samples to a hospital, and to doctors receiving free medicine samples while they are employed in a hospital. The hospital can treat such samples as a taxable perquisite for employees and deduct tax under Section 192. Section 192 deals with TDS on salary income.

In case of doctors who work as consultants with a hospital and receive free samples, TDS will apply first to the hospital, which in turn will be required to deduct TDS under Section 194R for consultant doctors.

“Ideally, doctors should refrain from accepting free samples, or they should accept free samples worth less than Rs 20,000 to avoid being taxed under this section,” says Chopra.

Scenarios in which Sec 194R doesn’t apply

• Sales discounts, cash discounts, and rebates allowed to customers

• Where some units of a product are rewarded on purchase of specific units of the same product (example, BOGO or buy one, get one) for a charge or substantial discount

• Section 194R won’t apply if the benefit or perquisite is provided to a government entity not engaged in a business or profession, such as a government hospital