Doctors and social media influencers are amongst those that will likely have to abide by a brand new rule issued by Central Board of Direct Taxes (CBDT) which mandates a 10% tax deducted at supply (TDS) on freebies they obtain from companies for gross sales promotion.
On Thursday, June 16th, the Central Board of Direct Taxes (CBDT) issued guidelines of what constitutes benefits or perquisites received in a business or profession cab be taxed at source. The provision was launched within the Finance Act of 2022 to widen the tax base and to ensure that those that profit from such gross sales promotion expenditure by companies report it of their tax returns and pay tax on what the price is. Medical doctors, from now on, will not be so quick to accept free medical samples and distribute them in a hospital.
The new TDS provisions are prompted by the new section in the Income Tax Act introduced under section 194R, that will come into effect on July 1st.
“Whether this (the product given for sales promotion activity 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 or perquisite for the purposes of section 194R of the Act (the TDS provision),” CBDT said. If the product is retained, then it will be in the nature of benefit or perquisite and tax is required to be deducted accordingly under section 194R of the Act, CBDT said.
Although legally speaking, sales, cash discount and rebates allowed to customers from listed retail price represent benefits. Subjecting these to tax deduction would put seller to difficulty. Therefore, to remove such difficulty, CBDT has clarified that no tax is required to be deducted under section 194R of the Income Tax Act on sales discount, cash discount and rebates allowed to customers.
194R – the new section introduced in the budget
In the budget 2022-23, a new section, 194R, in the I-T act was introduced. This section requires tax at source to be cut at the rate of 10% 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 clarity which the government has now provided on what are the benefits or perquisites that will come under the TDS umbrella.
How will doctors be affected by this?
Free medicine sample provided by a company to a doctor who is an employee of a hospital, or is a consultant, is also covered by the TDS provision. The TDS has to be deducted from the hospital on account of the doctor being an employee of the hospital. The hospital may subsequently treat this as a benefit given to the doctor, deduct income tax on it and claim deduction for this as salary expenditure.
“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,” CBDT states.
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.
What else falls within the scope of section 194R?
Capital assets given as benefits or perquisites are covered within the scope of Section 194R. This section 194R also applie 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 several practical issues for taxpayers.