New TDS sections 194R and 194S

By Vijender Singh — In Accounting Basics, Accounting Process, Tax Automation, Tax Law Changes, Tax Strategy — August 22, 2022



01 July 2022 marked another important date for the TDS provisions. It marked the introduction of new sections under the TDS chapter of the Income Tax, 1961. It remains in line with the directive of the government to bring more and more accountability and transparency in the economy. This time the government targeted new areas of the TDS application. 

One is the non-cash benefits that were being given to the third-party consultants and professionals and two, the TDS on the transactions of Virtual Digital Assets. 

Let’s understand the two sections and their implications:

  1. Section 194R – Deduction of tax in respect of the benefit or perquisite in respect of business or profession – 

The earlier provisions of the TDS sections had an elaborate section 194J wherein the remuneration and fees paid to the consultants and professionals were covered for TDS at 10%. However, this section was applicable to the fee paid to the professionals and non-employee external consultants. It has been observed over the period of time that many companies/ businesses do not directly pay the money to such professionals and outside consultants but they give them benefits or perks. Like a company may provide travel packages to the vendors who make good sales in a quarter. This typically happens because companies keep running contests for their dealers to make more and more sales each year and at the end of the year, there is usually a trip to foreign country that is awarded to the highest sale making dealers. 

From a general point of view such benefit received is income in the hands of the recipient but more often than not the recipient does not file the same as income in their ITR and the entire benefit or perk so received have been escaping from the gambit of income tax. 

Now, the government has decided to bring this under accountability. 

The result is the new section 194R which deals with the person / entity providing such benefit or perk in respect of business or profession to people other than the employees of the company.
Perks to employees are already under income tax purview by the way of 192 and the perks are taxable in the hands of the employees as salary. 

The text of the new section reads as: 

“The new section mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source @ 10% of the value or aggregate of value of such benefit or perquisite, before providing such benefit or perquisite. The benefit or perquisite may or may not be convertible into money but should arise either from carrying out of business, or from exercising a profession, by such resident.”

In simple words, any benefit or perk that is paid by a business to a person during the course of ordinary business which may or may not be convertible into cash (this shall cover vouchers and coupons), shall be termed as transaction liable to TDS @ 10%. 

The annual threshold for such benefits and perks has been kept at Rs. 20,000. 

Implication to the business accounting – 

It is imminent that the new section shall bring new challenges to the business accounting as now the accounting system has to be maintained in such a way that companies / businesses should be able to check who is the beneficiary of a particular expense done. 

For e.g., a business may be buying the travel tickets of the employees and also as a promotion of the sales and other relationships. The business may be providing travel opportunities as vouchers to its dealers and lead suppliers. 

In such a case, the business historically maintains one GL code as traveling expenses and keeps all the entries into the same GL code in the ERP and related finance department. This remains a useful manner of accounting still if there are clear demarcation of the beneficiaries. However, if there is no demarcation in the ERP system for the beneficiary then the entire process of finding out what are the transactions that need to be pulled out for TDS deduction and what are not subject to TDS is a very difficult task and manual process over spreadsheets.  All the transactions are required to be scrutinized by the beneficiary’s name and the person who actually traveled in the case of the traveling expenses. Similar challenges are there with the other perks and benefits given by the companies to their vendors in terms of accounting and reconciliation of these perks and benefits. 

For ease of reconciliation, it is advisable that 2 sub-GL codes or dedicated GL codes be maintained in the ERP. This way the expenses that are done for the employees are recorded separately and the expenses that are done for vendors are recorded separately. 

Maintaining dedicated GL codes also ensures that the auditors can also check the TDS liability under section 194R with more accuracy. Further, the tagging of the benefit recipient PAN has to be there in the system, so that the TDS returns be filed accurately and also the compliances under section 206AB can be followed in the system. 

Once the TDS have been deposited then the business also needs to be sure that either they collect money of TDS so deposited from the vendors/ clients/ external consultants or they gross up the transaction value for the correct calculation of the TDS liability. For e.g., a ticket may cost to the business Rs. 10,000 but when the TDS is to be deposited then the benefit in the hands of the recipient is (a) Rs. 10,000 of travelling ticket and (b) TDS so deposited towards his PAN number. 

Hence, the transaction value of the TDS needs to be grossed up for the correct calculation. In this case, the same has to be calculated as – 

Cost of Ticket = Rs. 10,000

Value of Transaction value (gross up) = 10,000 X 100/90 = 11,111/- 

The TDS becomes 1,111/-. It has been assumed that the business has not recovered the TDS from the beneficiary. Which is going to be more frequent case than a business actually asking for the TDS part from the recipient. 

Further, another challenge that may need more attention from the government is what should be the transaction value of the perk or benefit? Should it be the cost? Or the fair market value of the benefits or perks? From the general point of view, it may be considered that the cost value should be taken as transaction value but in terms of expanding the income tax base, the government may issue clarifications that the fair market value should be taken for the determination of TDS. 

  1. Section 194S – Payment on transfer of Virtual Digital Assets – 

This section is aimed to bring the accounting of the sales and purchase of the Virtual Digital Assets which is defined under section 2(47A) of the Income Tax Act, 1961 as 

(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;

(b) a non-fungible token or any other token of similar nature, by whatever name called;

(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify:

Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.

Explanation. —For the purposes of this clause, —

(a) “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;

(b) the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);]

The definition tries to bring the NFTs, Crypto currencies / assets and all other possible future “store of value” digital assets under the radar of Income tax and TDS provisions. 

This marks a landmark change in the Income Tax Act, 1961 because it recognizes the VDA as taxable and the accountability has been increased in this area. 

Two thresholds have been provided, 

  1. If the buyer is a specified person, i.e., an individual or a HUF who is not required to get his books audited which means the annual business turnover is less than Rs. 1 crore (or Rs. 50 lakhs in case of profession) and all those individuals and HUFs where there is no income from the head of the “Profits and Gains from Business and Profession”, the threshold is 50,000 as transactions limit. 

That means if the consideration so paid is less than 50,000 for the VDA then the TDS need not be deducted. 

  1. If the buyer is an auditee under IT Act or firm or LLP or company or any other person whose books are required to be audited then the threshold has been provided as Rs. 10,000 transaction limits. 

That means TDS need not to be deducted if the VDA has been bought for less than Rs. 10,000/- 

Implication to the business accounting – 

This section may have special business accounting implications if the taxpayer is an exchange and they take care of the payments and collection of money. Otherwise, the section demands the ordinary accounting requirements which are similar to other TDS sections. This means that the buyer needs to maintain the PAN numbers of the sellers, maintain the record of the buy and sell transactions with respect to all the buyers and sellers of the VDA it has dealt with. 

This section still needs more clarifications in the following regards

  1. The sale and purchase of cryptocurrencies usually takes place at the crypto exchanges, just like a stock exchange, where the identity of the buyer and seller is not revealed. So, in such cases, how will it be possible for the buyer to deduct TDS in the name of the seller of such virtual digital assets? In such cases, whether the crypto exchanges will be required to deduct the TDS? 
  2. The current definition of ‘Virtual Digital Asset’ in the newly proposed section 2(47A) in the Income Tax Act, excludes ‘foreign currency’ from its ambit. The most commonly used cryptocurrency, ‘Bitcoin’ has been recognized as ‘legal tender’ in the country El Salvador, w.e.f. 1.9.2021 (as per the Wikipedia), and as such, it is amenable to be considered as a ‘foreign currency’. So, the currently proposed definition of ‘virtual digital asset’ in section 2(47A), will exclude ‘Bitcoin’ from its ambit, which will defeat the very purpose and objective of bringing about this amendment.

As we move forward, there may be more questions that will come for 194S. 

01 July 2022, marks the important date of these sections and also the way the government is thinking about the taxes in the country. The government has been ahead in terms of bringing more and more items under TDS. Gone are the days when the government used to be a way for the assessee to submit the return to take tax at the end of the year. Nowadays, the government is eager to impose tax on the transactions that are revolving around all year long and the assessee(s) have to be more ready to claim the right claim of refunds and credits from TDS so deducted. 

This marks another confirmation that the Indian Businesses have to implement more and more clear-cut transactions recording and analyzing systems in place so that they can deposit their liabilities adequately and also claim the TDS credits the right way. This makes the role of technology more and more concrete in the corporate finance world of Indian business houses.

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