Tax on drinks at gala nights! New TDS rules can mess up your tax math – The Economic Times

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Section 194R – that comes into effect from July 1 – provides that if any ‘person’ (barring those excluded) provides any benefit or perquisite exceeding ₹20,000 in a financial year, to a resident, which arises in the course of the business or profession of such resident, then tax is required to be deducted at source at 10%.

Lubna Kably

Lubna Kably

Lubna Kably is a senior editor, who focuses on various policies and legislation. In particular, she writes extensively on immigration and tax policies. The Indian diaspora is the largest in the world; through her articles she demystifies the immigration-policy related developments in select countries for outbound students, job aspirants and employees. She also analyses the impact of Income-tax and GST related developments for individuals and business entities.

Tax deducted at source (TDS) stood at ₹2,29,676 crore, comprising a little over 60% of the gross direct tax collections of ₹3,69,559 crore for 2022-23, as on June 16. In fact, the TDS collection showed a hike of nearly 46%, as compared to the corresponding period of the previous financial year.

TDS translates into immediate revenue, as tax is collected at source and prevents revenue leakage. It is not surprising that GoI places heavy


NSE 1.42 % on the TDS mechanism, which via introduction of Section 194R – that comes into effect from July 1 – has been further widened. As they say, a bird in hand is better than two in the bush. In the tax arena, TDS is the proverbial golden goose.

This section provides that if any ‘person’ (barring those excluded) provides any benefit or perquisite exceeding ₹20,000 in a financial year, to a resident, which arises in the course of the business or profession of such resident, then tax is required to be deducted at source at 10%.

The obligation to deduct tax at source does not apply to a select few, such as salaried individuals. Further, individuals or Hindu Undivided Families (HUFs) whose turnover (in the year prior to providing such benefits or perquisites) does not exceed ₹1 crore in case of business, or ₹50 lakh in case of profession, are exempt from the obligation to deduct tax at source.

Thus, areas under which Section 194R can apply are wide and tax deductors will have to be extra careful. If they do not meet their TDS obligations, it would result in disallowance of the expenditure and also interest and penal consequences.

The Explanatory Memorandum to the Finance Bill, 2022, had pointed out that benefits or perquisites (whether convertible into money or not) that are taxable under Section 28(iv) under the head ‘business income’ are in many cases not reported by the recipient. Section 194R was introduced to plug this non-reporting and resultant tax leakage.

However, the guidance note seems to have vastly stretched the understanding contained in the explanatory memorandum. The note adds that the provider of benefits is not even required to verify whether the benefit of perquisite is chargeable to tax and, if so, under which provision.

In one stark much-talked-about instance, a non-benefit also translates into an income of the recipient. As per this guidance note, a free medicine sample is to be treated as part of the ‘salary income’ of a doctor who is employed in a private hospital.

The guidance note states that the provider of the free samples (typically, it will be a pharma company) has to withhold TDS in the name of the hospital. If this sample is used by the employee-doctor, it will be a taxable perquisite under the head ‘salary income’. The hospital will deduct tax against the salary income and the doctor can take credit for it, in his or her income-tax return. If the sample is being provided to a doctor who is a consultant, the pharma company can withhold tax either in the name of the hospital or the consultant-doctor.

As a government entity – which includes a government hospital – does not carry-on business or profession, the provisions of Section 194R do not apply. Thus, doctors of government hospitals who get free samples will be spared of the TDS provisions.

The fact remains that a doctor – be he or she one who is engaged with a private or a public hospital – passes on the free samples to patients. Why, then, the differential treatment? Social media influencers who return the goods they promoted are not subject to TDS. Doctors aren’t retaining or consuming the free medicine samples either.

Valuation of the benefit for the purpose of TDS, which is to be at ‘fair market value’, could be a minefield for litigation. A question also arises – can the recipient of the benefit adopt a different value for the purpose of computing his or her income? If the recipient treats it as non-taxable, this will still feature in the annual information statement as ‘income’ and, perhaps, lead to scrutiny assessment.

At dealer or business conferences, the ‘leisure’ component is subject to TDS, even if it is incidental to the conference, states the guidance note. So, during a gala night, will someone have to count the drinks consumed by each attendee to determine the value and correct TDS? Ascertaining the value of the leisure component and its allocation is fraught with practical difficulties. There are several more contentious issues to tackle, like the treatment of loyalty points, free air miles, etc.

While income (including benefits) needs to be taxed, the TDS mechanism should not entangle the golden goose in the litigation net.

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