Experts raise several red flags around section 194R of the Income Tax Act

The section introduced in the Finance Act, 2022 to reduce evasion and widen the tax base has some conflicting provisions apart from other challenges

Section 194R of the Income Tax Act, 1961, which makes it necessary to deduct 10 per cent tax at source on the value of any benefit or perquisite received by a resident Indian, was introduced by the government to widen the tax base and reduce tax evasion in the country. Experts, however, have flagged several complications around it.

"The threshold prescribed under section 194R does not sync with threshold prescribed under section 56," said Amrita Bhatnagar, Associate Director, at RBSA Advisors.

Under section 56, if the receipt of benefits by an individual or a Hindu Undivided Family (HUF) exceeds Rs 50,000 in a year, they are liable to pay a tax on it. However, under section 194R, the limit is Rs 20,000. 

"At the very instance, this would lead to tax outflow which is actually exempt in the hands of the recipient," she added.

The section will not apply if the value of "benefit" or "perquisite" provided is less than 20,000. "The term 'benefit' or 'perquisite' is not defined in the Act," Akhil Chandna, partner, Grant Thornton Bharat, told Business Standard.

The government had earlier stated that the receipt may be in cash or kind, but no clear definition was provided. 

Experts also pointed out that this would lead to additional administrative challenges.

Chandna said, "The section also covers certain services or products that are customarily provided to the recipient of goods or services as a part of common trade parlance."

This includes freight being paid on behalf of the receiving party and payments made for administrative convenience. "This will lead to unnecessary complexities and unwarranted litigation," he added.

Bhatnagar further pointed out that the provider of the benefit will have to ensure that the tax required to be deducted has been paid before releasing the benefit. "This will additionally impose administrative difficulties on the provider of the benefit," she added.

Valuation of "benefits in kind" could be challenging, and overall provisions would make compliances more cumbersome, they further said.

However, if both sections 56 and 194R apply to a recipient, experts suggested that due to a lack of clear guidelines, they must pay the higher tax and claim the refund later through the income tax return (ITR).

"If a company deducts tax, it will be to the credit of the recipient," Bhatnagar said, "If it is not adjusted, then the recipient can claim the refund later."