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Complimentary gifts, Foreign and domestic trips that companies give out for free will be under TDS provision now

The junkets that companies take their dealers and distributors on will be subject to income tax which will have to be borne by the beneficiary, according to tax experts.

The government has added a new section to the Income Tax Act, namely Section 194R, which aims to bring such sops under the ambit of tax deduction at source (TDS).

And it’s not just these foreign and domestic trips that will be taxed – even the complimentary gifts that companies give out will come under the ambit of Section 194R.

An announcement to this effect was made in this year’s budget.

However, final operating procedures in the matter are yet to be issued by the tax department.

Tax experts said that although dealers don’t spend any money on these trips and gifts, they will still be required to pay tax on them if the value of such sops exceeds Rs. 20,000 in a financial year. The companies providing these benefits are required to deduct 10% TDS before providing such sops.

While the company will deduct TDS, the recipient may have to pay additional tax depending on the income bracket they fall under. This additional tax will have to be filed along with annual returns. Tax experts say, companies will have to assign a monetary value to the sops they offer to their dealers so that they can apply the appropriate TDS amount.

An email query sent to the finance ministry remained unanswered till as of press time.

“There are several examples where professionals are taken on all-cost-paid international travel.

In some cases, they may be offered to fly the company owned/chartered flight. In other cases, gold coins or vehicles may be provided as a gifts,” said Suresh Swamy, partner, Price water house & Co.

“However, to constitute a benefit or perquisite, it will need to be linked to the business or profession of the recipient.”

While any incentive received by a business professional is liable for income tax even now, most of them don’t declare the sops and, hence, escape the tax net. But now, since the companies will have to deduct TDS, they will have to provide the TDS Information to the tax department. Through this, the tax department will get information on people or entities that have availed of such sops.

“The idea is to capture unreported income of persons who receive benefits in cash or kind in the course of their business or professions,” said Rohinton Sidhwa, partner, Deloitte India. “Many of these incentives hither to untax because such persons considered them to be perks as a consequence to their business and failed to offer them up to tax.”

It is a common practice for companies in consumers-facing sectors to give special incentives to top-performing dealers and distributors as they constitute a vital part of the sales force.

A senior tax consultant told ET that the government recently learnt that a leading automaker had given sops worth Rs.160 crore to its distributors in a single year, but, none of the recipients reported it in their tax filings.

“One the one hand, the businesses giving such gifts may claim these as tax expenses, but the person receiving them may not disclose this as income,” said Amit Maheshwari, partner, AKM Global.

“The provision intends to create a trail where the tax department would be able to reconcile the tax deduction made by the payer and the income reported by the beneficiary.”

This new tax section only applies to business income; the treatment of incentives for salaried class employees remains unchanged.

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