File Your Income Tax Return Before 31st July 2024.
Tax Deducted at source contains various sections two important TDS sections are 194R (Nexus with Business or Profession) and 194S (Transfer of Virtual Assets & Cryptocurrencies). These sections are like main characters when it comes to Tax Deducted at Source (TDS). The TDS Section 194 R deals with the taxation of perks or benefits related to businesses or professions and the subsequent deduction of taxes., while Section 194S links with implementation of TDS on the transfer of virtual digital assets and cryptocurrencies For people involved in these money matters, it’s important to understand these sections well to make sure they follow the tax rules correctly. For people to follow rules properly
Meaning of Section 194R
Section 194R, which is part of the Finance Act 2022, deals with the taxation of perks or benefits related to businesses or professions and the subsequent deduction of taxes. Businesses frequently offer various benefits and privileges to their distributors, channel partners, agents, or dealers as a means of incentivizing and motivating them to continue promoting business growth. Some instances include travel deals, gift cards or vouchers, items offered in incentive programs, or the utilization of company resources, among other possibilities.
Purpose of Section 194R
The introduction of Section 194R aims to prevent potential tax revenue leaks or evasions in various businesses or professions. Several companies submitted expenditure claims for business promotions, wherein they provided distributors, dealers, or channel partners with gifts, incentives, privileges, or advantages. These offerings were given either in accordance with agreed conditions or as per the customary practices that the company had followed over the years. All these expenses fall under Section 37 of Income tax Act, 1961.
According to Section 28 (iv) of the ITA, any benefit or perk received from business or a profession, regardless of whether it can be converted into money, will be considered as business income for the recipient and subject to charges.
As per Section 194R, if a company provides distributors or channel partners with any benefits or rewards, whether in the form of cash or other forms, they must withhold a TDS. If the benefit is entirely non-monetary, the individual offering such a benefit or advantage must personally bear the cost of TDS (Tax Deducted at Source) based on the value of that benefit or advantage. Section 194R aims to broaden the number of taxpayers and prevent any possible tax fraud by closing any loopholes.
Let’s take 194R TDS example, when a healthcare professional is given complimentary samples, it must be acknowledged as an advantage or privilege and is considered as earned income. This is independent of the fact that the pharmaceutical company is utilizing it as a method of promoting sales. The pharmaceutical company has the ability to make a deduction for this sales promotion. Nevertheless, once the receiver gets hold of the promotion, it becomes a source of taxable income, which necessitates the pharma company to subtract TDS from it.
Scope of Section 194R of Income Tax Act, 1961
Under section 194R of Income Tax Act, bare act tax deduction of 10% will be applicable. This rule only pertains to individuals who are residents and receive benefits or privileges. Nevertheless, if the total value of a benefit or prerequisite provided to an individual beneficiary does not surpass Rs 20,000 within the financial year, Section 194R does not apply. Additionally, if the total sales in the previous financial year for Hindu undivided Families or individuals does not exceed 1 crore Rupees for business and 50 Lakhs for profession then TDS need not to be deducted.
Nexus with Business or Profession – Section 194R
Any person who grants to a resident any benefit or privilege, whether convertible into money or not, arising out of the business or exercise of a profession by such resident must, before granting such benefit or privilege to such resident, make sure tax is withheld.
In simple terms, TDS under Section 194R applies to any resident who grants any benefit or privilege to another resident. The benefit must be in the form of benefits in kind or in cash and can be achieved by promoting the company.
Section 194R Applicability
This section 194R TDS applicability applies when a company, firm or professional provides a benefit, gift, incentive, or other benefit (monetary or non-monetary) to a person during the year in cash, in kind or in part of cash and in-kind benefits worth more than 20,000 rupees granted during the financial period.
Who can deduct TDS under Section 194R?
If a business, company, or professional offers rewards, entitlements, or privileges to an agent, dealer, channel partner, distributor, or another individual within the fiscal year, they are required to subtract TDS under Section 194R.
Non-applicability of TDS under Section 194R
Section 194R is not applicable to individuals who are employees and receive benefits from their employers. They will be subject to Section 192. If the person receiving the funds is not a resident, they will have taxes deducted according to Section 195. If there is no existing business connection, this section will not be relevant. The deduction and payment of TDS should be the responsibility of the company, business, or professional offering benefits or perquisites, which must be done prior to providing these benefits or perquisites.
FAQ regarding Section 194R
Is Section 194R applicable for gifts, advantages, or privileges received on special occasions like festivals or wedding ceremonies?
No, the application of Section 194R will only be valid for benefits or privileges originating from a business or professional activity.
What does the TDS certificate mean?
The TDS certificates comprise of Form 16, Form 16A, Form 16B, and Form 16C. When deducting TDS, an individual is required to provide certificates to the recipient, detailing the deduction of income tax made during the payment process.
For the purpose of Tax Deduction how can be determining the non-monetary benefit?
The cost of a non-monetary advantage or privilege needs to be determined by considering the reasonable market price of those goods.
Will Section 194R classify discounts, cash discounts, and rebates as benefits or perks?
Discounts and rebates won’t be as significant when deducted from the sale price. Therefore, they are not regarded as advantages or privileges.
Does Section 194R Income Tax Act apply to the staff members?
No, the provisions of Section 194R do not cover the perks and benefits granted to employees. The tax deduction on these will be carried out as per Section 192 of the Income Tax Act.
Meaning of Section 194S of Income Tax Act
In the budget of 2022, Smt. Nirmala Sitharaman presented a new section 194S which entails the introduction of TDS. This part specifically addresses the implementation of TDS on the transfer of virtual digital assets and cryptocurrencies. This measure was implemented to enable the government to monitor and trace these transactions. As a result, the government implemented a new rule where 1% will be subtracted in the event of a VDA transfer exceeding Rs.10,000.
What is Virtual Digital Asset?
- VDA or virtual digital assets, as defined in section 194S of the Income Tax Act, include the following – Cryptocurrencies: Information, tokens, cryptography, or generated code by cryptographic means or otherwise.
- NFT: Non-fungible token or any other token similar to it.
- Any other digital assets notified by the central government in the Official Journal.
Meaning of Specified Person under Section 194S
In case of nominated person, the payment made for remittance of VDA is more than 50000 and 10000 in other cases then TDS under section 194S is applicable the nominated person is – A natural person or HUF with no business or professional income. Individuals or HUFs with business income up to Rs. Individual or HUF with business turnover up to Rs 50 lakh.
Any person making VDA transfer payment to a resident should deduct at the time of payment or at the time of crediting amount to resident bank whichever is earlier 1% TDS.
Who should deduct TDS under section 194S?
Liability to deduct TDS under section 194S TDS rate is different in different cases –
- VDA Peer-to-Peer (P2P) Transfer VDA Buyer is the first to deduct TDS at 1%. Buyer must file Forms 26Q and 26E.
- Transfer VDA through exchanges and VDA not on exchanges (in cash)
Case 1: The buyer pays the stock exchange (directly or through a broker) The stock exchange is the main responsible party for deducting TDS. Tax can only be deducted through the stock market. Exchanges must fill out Form 26Q.
Case 2: The payment between the seller and the stock exchange is done through the broker The stock exchange and the broker are primarily responsible for deducting TDS. The broker can deduct tax only if both have a written agreement that the broker will deduct TDS. Brokers must file Form 26Q and exchanges must file Form 26QF.
Transfer of VDA through exchange and VDA owned by exchange.
Case 1: Buyers pay the floor through a broker.
The broker is primarily responsible for deducting TDS. A stock exchange can pay tax if there is a written agreement between both parties that the stock exchange will deduct TDS. Exchanges must file Form 26QF and ITR.
Case 2: Buyer credits or pays directly to the exchange Buyer is the main deductor of TDS Exchange can pay tax if there is a written agreement between both parties accordingly the exchange will pay taxes. Form 26QF and ITR have to be filed by the stock exchange.
Transfer of VDA in Kind
Case 1: Transaction not effected by exchange Buyer is primarily responsible for deduction of TDS Buyer will consider in kind if seller provides challan. Buyer needs to fill Form 26Q and Form 26QE.
Case 2: Transaction through exchange Exchange is the main responsible for deduction of TDS Exchange can deduct tax on the basis written contract agreement between related parties. Exchanges must file Form 26Q.
Issuance of TDS certificate under section 194S
TDS certificate is issued by the deductor to the deductee in Form 16A in respect of TDS deducted on remittance of VDA. The policyholder can claim credit at the time of filing RTI. The introduction of this section establishes clear guidelines on TDS (tax deducted at source) on these transactions, demonstrating the government’s commitment to creating a regulated financial ecosystem closer.
Whether you are a buyer, seller, exchanger, or broker, it is essential to comply with these regulations, ensure timely filing of TDS returns and stay up to date with updates on Latest tax.
Takeaway
To sum it up, understanding TDS in Section 194R Income Tax Act and Section 194S Income Tax Act is crucial for both people paying money and those receiving it. Following these rules not only keep you in line with the law but also lowers the chance of fines and legal issues. Because these rules help make tax collection work better, it’s important for individuals and businesses to know what’s going on and make sure they do their TDS duties correctly. This way, we contribute to a clear and responsible financial system.
