If you are a doctor or social media influencer, then you will have to follow the new income tax rule which comes into effect next month and makes a 10 per cent tax deducted at source (TDS) mandatory on the freebies received from sales promotions.
The Central Board of Direct Taxes (CBDT) last week issued guidelines on the applicability of new TDS provisions regarding benefits received in a business or profession and said that such perquisites can either be in cash or kind or partly in both of these forms. It said that the payer/deductor need not check the taxability of the sum in the hands of the recipient, and the nature of the asset given as benefit or perquisite is not relevant. Even capital assets given as benefit or perquisite are covered within the scope of Section 194R.
Section 194R shall apply to sellers giving incentives, other than discounts or rebates, which are in cash or kind e.g., car, TV, computers, gold coin, mobile phone, sponsored trip, free tickets, medicine samples to medical practitioners.
The guidelines explain the circumstances in which the new TDS provision which kicks in from July 1 will apply. This new TDS provision was introduced in Budget 2022-23 to broaden the tax base and ensure that those beneficiaries of such type of sales promotion expenditure by businesses, report it in their tax returns and pay tax on what the benefit is worth.
A new section, Section 194R, in the I-T Act was brought in which requires deduction of tax at source at the rate of 10 per cent by any person, providing any benefit or perquisite exceeding Rs 20,000 in a year to a resident, arising from the business or profession of such resident.
In the case of social media influencers, they will be liable for TDS if the product allotted to them by a company for its marketing efforts is retained by the individual. However, the TDS will not apply if the product is returned to the company, CBDT said.
“Whether this (product given for promotion activities in social media) is benefit or perquisite will depend upon the facts of the case. In case of benefit or perquisite being a product like car, mobile, outfit, cosmetics etc and if the product is returned to the manufacturing company after using for the purpose of rendering service, then it will not be treated as a benefit/perquisite for the purposes of section 194R of the Act. However, if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the Act,” the CBDT notification explained.
The CBDT has also clarified in its circular that no tax will be required to be deducted under section 194R of the Income Tax Act on sales discount, cash discount and rebates allowed to customers. However, the scenario would get a little twisted if free samples are given as the relaxation does not apply to them.
In the case of doctors, CBDT clarified that if doctors are receiving free samples of medicines while employed in a hospital, Section 194R would apply on the distribution of free samples to the hospital. The hospital as an employer may treat such samples as taxable perquisite for employees and deduct tax under Section 192. In such cases, the threshold of Rs 20,000 has to be seen with respect to the hospital.
“To illustrate, the free medicine sample may be provided by a company to a doctor who is an employee of a hospital. The TDS under section 194R of the Act is required to be deducted by the company in the hands of hospital as the benefit/perquisite is provided to the doctor on account of him being the employee of the hospital. Thus, in substance, the benefit/perquisite is provided to the hospital. The hospital may subsequently treat this benefit/perquisite as the perquisite given to its employees (if the person who used it is his employee) under section 17 of the Act and deduct tax under section 192 of the Act. In such a case it would be first taxable in the hands of the hospital and then allowed as deduction as salary expenditure. Thus, ultimately the amount would get taxed in the hands of the employee and not in the hands of the hospital. Hospital can get credit of tax deducted under section 194R of the Act by furnishing its tax return. It is further clarified that the threshold of twenty thousand rupees in the second proviso to sub-section (I) of section 194R of the Act is also required to be seen with respect to the recipient entity,” the guidelines read.
For those doctors who are working as consultants with a hospital and receiving free samples, TDS would ideally apply on the hospital first, which in turn would require to deduct tax under Section 194R with regard to consultant doctors. To remove this difficulty, CBDT clarified that as an alternative, the original benefit or perquisite provider may directly deduct tax under Section 194R with regard to the consultant doctor as a recipient.
Apart from the above, CBDT has informed that Section 194R will not apply if the benefit or perquisite is provided to a government entity, like a government hospital, not carrying on business or profession.