Explained — new tax rules for perks, medical samples, gifts to influencers

The word “perks” for employees will take on a new meaning now after new tax deducted at source (TDS) rules come into force from July 1.

Employees will have to think twice before accepting a company “perk” like a free IPL ticket or a foreign trip abroad anymore. And, medical doctors will not be so quick to accept free medical samples and distribute them in a hospital, while a social media influencer may just turn their back on taking home that car, mobile or the outfit they promote.

This is all because of the new TDS provisions introduced under a  section, 194R, that will come into effect from July 1. On Thursday, the Central Board of Direct Taxes (CBDT) on Thursday (June 16) had issued guidelines spelling out in detail what constitutes benefits or perquisites received in a business or profession, which will be taxed at source. This move was prompted by the new section brought in the I-T Act.

194R – the new section introduced in the budget

In the budget 2022-23, a new section, 194R, in the I-T act was introduced, which requires tax at source to be cut at the rate of 10 per cent by any person, providing any benefit or perquisite exceeding ₹20,000 in a year to a resident, which is arising out of business or profession of the resident.

This provision was brought in to contain tax revenue leakage. But, there were doubts that needed to be cleared and the government has now clarified what are the benefits or perquisites that will come under the TDS umbrella.

Taxing free samples distributed by doctors in a hospital

CBDT clarifies that Section 194R would apply if the doctors receive free samples of medicines and distribute them while employed in a hospital. The hospital as an employer will have to treat such samples as a taxable perquisite for employees and deduct tax under Section 192. The hospital has to keep the annual threshold of ₹20,000 in mind before cutting the tax.

The exception to the rule for doctors

Section 194R shall not apply if the benefit or perquisite is provided to a government entity, like a government hospital, not carrying on business or profession.

How social media influencers are impacted

If a social media influencer retains a product like a car, mobile, outfit, cosmetics, etc., after using it to provide a service (promote it on their social media handles), then it will be treated as a benefit/perquisite under the newly-introduced section 194R of the IT Act.

However, if the influencer returns the product to the manufacturer, it is not taxable.

What else falls within the scope of section 194R

Even capital assets given as benefits or perquisites are covered within the scope of Section 194R. Also, section 194R shall apply when a person gives incentives, other than discount or rebate, which are in cash or kind e.g., car, TV, computers, gold coin, mobile phone, free ticket or when a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets.

What is excluded from Section 194R

The CBDT provided a breather on sales discounts, cash discount and rebates allowed to customers by excluding them from the purview of Section 194R since that would put the seller into difficulties.

However, tax experts felt the applicability of this section in cases of the recipient not engaged in business or profession etc., could lead to a number of practical issues for taxpayers.