[Opinion] GST Applicability on ‘Benefits under 194R’

Shubham Khaitan – [2022] 145 taxmann.com 376 (Article)

Introduction

Section 194R of the Income Tax Act 1961 has been introduced with effect from 1st July 2022. As per the said provision, TDS is applicable @10% on a person providing any benefit or perquisite (in cash or in-kind) arising out of business or profession to another person if the value of the said benefit exceeds Rs. 20000 in a financial year. Such prerequisite may be paid either in cash or kind. Incentives in kind may include providing a Television, sponsored trips, gold coins, electrical appliances, etc. Both the Income tax law and the GST law should go hand in hand for the purpose of treatment of such perquisite or benefit.
For the purpose of understanding, let us assume that a manufacturer (say X) provides incentives worth Rs. 1,00,000 in the form of gold coins to a distributor (say Y). It is assumed that this is provided against carrying out of a special sales promotion drive by Y which results in increased sales revenue for both X and Y.

Nature of the incentive – Perquisite vs Gift

1. At the outset, one needs to understand the nature of the incentive – gift or incentive. The word ‘gift’ has not been defined in the CGST Act. Thus, to determine the meaning of this term, one would have to refer to other laws as well as case laws.

i. The Gift-Tax Act had defined the word “gift” to mean transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money’s worth.

ii. Black’s Law Dictionary, defines gift to mean a voluntary conveyance of land, or transfer of goods, from one person to another, made gratuitously, and not upon any consideration of blood or money.

iii. The Supreme Court cited the definition of ‘gift’ from Corpus Juris Secundum, Volume 38 in the case of Sonia Bhatia v. State of UP [1981] 2 SCC 585 as follows: A ‘gift’ is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation therefor.

2. Therefore, a ‘gift’ is a gratuity and an act of generosity and does not require consideration. However, if there is a consideration for the transaction, it is not a gift. Thus, for any item to be held as a gift, there are two basic ingredients that MUST exist:

(i) Absence of any contractual obligation

(ii) Absence of consideration in money or money’s worth either.

3. Further, in the press release dated 10th July 2017, the government distinguished gifts and perquisites in case of employment. It was stated that perquisite is provided out of contractual obligation whereas gift is voluntary and without consideration.

4. In Circular No. 172/04/2022-GST dated 6th July 2022, perquisite in case of employment arises in terms of contractual agreement entered into between the employer and the employee. Hence, perquisite arises from the terms of the contract between two persons.

5. In the given case, the incentives are being provided upon fulfillment of certain contractual obligations i.e. undertaking of special sales promotion drive. Therefore, this incentive cannot be called a gift but a prerequisite.

TDS Applicability in the hands of X

6. Since the incentives provided are in the nature of perquisite or benefit, the same would be liable for deduction of TDS under Section 194R of the Income-tax Act 1961. X needs to deduct TDS at the rate of 10% on the value of the prerequisite.

7. Assuming the value of the perquisite as 100,000, the TDS of Rs. 10,000 needs to be deducted before providing the incentive in the form of a gold coin. This Rs. 10,000 needs to be discharged by X as a liability for TDS. Therefore, X should provide the gold coin of the value of 90,000 plus 3% GST.

8. Alternatively, a gold coin worth Rs. 100,000 plus 3% is provided as an incentive. Thereafter, Y can make the payment of challan as advance tax for Rs. 10,000. This would be provided to X who would report in its TDS return.

Income tax treatment in the hands of Y

9. Section 28(iv) of the Income Tax Act clearly provides that the value of the benefit or perquisite arising from business or profession would be chargeable under the head ‘Profits and gains of business or profession.

10. The gold coin received is received against as an incentive against the business activity of running the special sales promotion drive. Therefore, the gold coin would be considered as a perquisite arising out of business or profession.

Click Here To Read The Full Article