TDS U/S 194R ON ADVANTAGE OR PERQUISITES
Budget Proposal:
The Finance Bill 2023 proposes to amend Section 28(iv) of the Income Tax Act, 1961 (IT Act) to include cash/ monetary perquisites as well within its ambit. Similarly, it is proposed to clarify that withholding tax under Section 194R of the IT Act is applicable whether the perquisite received is in cash or in kind or partly in cash and kind. The amendment is proposed to be effective from 1 April 2023.
Background of the Issue:
It is a settled position under Section 28(iv), including the decision of Hon'ble Supreme Court in CIT v. Mahindra & Mahindra Ltd. [2018] 93 taxmann.com 32 (SC), that the said Section only taxes non-monetary business perquisites and excludes any cash / monetary perquisites from its ambit. Additionally, Finance Act, 2022 introduced withholding tax on business perquisites vide Section 194R. Further, the Guidelines to Section 194R specify that all business perquisites, whether in cash or in kind or partly in cash and kind, are subject to withholding of taxes. This created a controversy whether the Guidelines, being a delegated legislation, exceed its mandate and widen the ambit of Section 194R to cover monetary perquisites, which were otherwise not expressly covered within ambit of Section 28(iv).
Impact and ELP Insights
- Companies providing cash perquisites to their customers, service providers and vendors may have to withhold tax under Section 194R w.e.f. 1 April 2023.
- The proposal is likely to increase compliance burden on the businesses.
- The very purpose of introduction of the withholding provisions under Section 194R was to tap income on account of non-monetary perquisites to widen the tax net as these items were going unreported, in various cases, at the recipient's end. However, introducing withholding tax on cash perquisites may not have similar effect as monetary perquisites are generally accounted as income and thus, are taxed
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