By Sandeep Jhunjhunwala, with inputs from Palak Gupta and Merlin Maleques
Since time immemorial, provision of “benefits and perquisites” have been an essential element for attracting and keeping a hold on top talents in the business world. Equally, such efforts have also been made by business houses for their customers, suppliers and other vital connections in the supply chain to augment existing business relations. Customarily such benefits and perquisites are either in the form of cash or partly in cash and partly in kind, which are taxable in the hands of the recipient as per the underlying provisions of the Indian Income tax Act.
By the label given to the transaction, “benefits and perquisites” are recognised under two distinct provisions under the Income Tax Act, ie taxability in case of employer-employee relationship, under Section 17 and benefit or perquisite emanating out of business or profession, under Section 28. Nonetheless, more often than not, the Government has observed that recipients have failed to report receipt of such benefits and perquisites in income tax return, thus, actuating incorrect disclosure of income and consequently leading to a possible revenue leakage. To straighten the curve and widen the tax base, a new provision under Section 194R was added to the Finance Act 2022, mandating deduction of tax at source at 10 percent on benefit or perquisite given to any resident in the course of carrying on business or profession, directly leading to tax outflow, which was in point of fact, exempt in the hands of the recipient.
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The release of this section raised eyebrows among stakeholders, experts, and various industry/ professional forums, flagging several snags around the interpretation and implementation of the said Section. Consequently, mulling over the fact that the Act does not define benefit/ perquisite, the Central Board of Direct Taxes vide Circulars issued guidelines and clarifications on applicability and interpretation of new Section 194R. Few notable clarifications included, persons required to withhold tax need not check taxability of benefit in the hands of recipient, benefits to be taxable even if it is in the nature of capital asset, no requirement of withholding by a listed company on issuance of right or bonus shares to its shareholders, etc.
Though several clarifications were provided, one substantial clarification is that a bonus or right share issue would fall within the scope of ‘benefit or perquisite’ liable to TDS in the hands of issuing private company. At the time of introduction of Section 194R, the memorandum to Finance Budget 2022 explained that the said Section has been introduced for withholding taxes on income chargeable to tax under Section 28 of the IT Act. However, the above-mentioned clarification provided on issuance of bonus or right shares by private companies, moulds the applicability of Section 194R independent of the taxability of benefit or perquisite under Section 28 of the Act, thereby, broadening the scope of Section 194R and defeating the intention of the law made available in the memorandum.
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It is imperative to note that the implementation of the said Section in consensus to issuance of bonus and right shares by a private company is not as simple as the clarification provided. One of the critical observations is that no explicit methodology is prescribed for determination of fair market value of benefit arising from bonus or right shares for the purpose of withholding taxes. Besides, bonus shares are issued by private companies by capitalising their excess reserves and does not pass on any additional benefit to shareholders. Also, where the benefit or perquisite is made available in kind by a private company, as per new Section, there is a requirement to collect tax declaration and tax challan from the shareholders prior to issuing such shares without which bonus or right shares cannot be issued to its shareholders. As a result, snowballing compliance burden on private companies.
On capital gains matter, basis the current provisions of the Act, it is understood that a taxpayer is required to pay taxes on gains arising at the time of sale of bonus or right shares. However, as per new Section 194R, tax is required to be withheld at the time of issue of bonus or right shares, accordingly, recipient may not be able to claim this TDS credit in the year of issuance of bonus or right shares (if not sold in the year of issuance) and will be required to carry forward such TDS credit till the time such shares are sold. Consequently, this could lead to a mismatch in the taxable income of the recipient as per the income tax return and annual tax statement generated by Tax Department.
To conclude, while the current clarifications are much appreciated, taking into consideration the novel nature of the Section and the wide ambit of experts interpretating the same, inevitably more and more issues would be spotted. In light of this, it is anticipated that the Board should come up with supplementary clarifications to ease the challenges faced by taxpayers.
(Sandeep Jhunjhunwala, M&A Tax Partner, Nangia Andersen LLP, with inputs from Palak Gupta and Merlin Maleque. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com. Please consult your financial advisor before investing.)