Vide Budget 2022, the Government has introduced Section 194R in the Income Tax Act, 1961 (‘ITA’) obligating deduction of TDS on ‘any benefit or perquisite, whether convertible into money or not, arising from business or exercise of a profession’. This provision is applicable from July 1, 2022 where aggregate value of benefit or perquisite to a recipient exceeds Rs. 20,000 in a financial year.

This provision has again raised discussion with respect to GST liability on various benefits passed on by OEMs to their trade partners. Here, it is relevant to discuss background and scope of Section 194R and its implications under GST law (if any).

Background of introduction of Section 194R and its scope

‘Value of benefits and perquisites arising from business or exercise of profession’ are exigible to Income Tax as ‘Business income’ under Section 28(iv) of the ITA. Basis the Budget Memorandum, in general, taxpayers do not report these benefits and perquisites (‘benefits’) as their income nor pay Income Tax thereon. To ensure Income Tax payment on these benefits, Section 194R has been introduced to obligate person giving such benefits to deduct TDS.

As Section 194R is a mirror image of Section 28(iv), jurisprudence on scope of Section 28(iv) is relevant to understand scope of Section 194R. In terms of settled jurisprudence, benefits will be taxable under Section 28(iv) only if they satisfy following conditions:

• Benefits must have nexus with business or profession of recipient and arise as a result of business relationship between parties.
• Benefits should be in addition to regular consideration; and
• Expression ‘whether convertible into money or not’ mean that benefits must be in kind. Accordingly, cash benefits stand excluded from this provision.

Implications under GST law

• Under GST law, any benefits arising as result of quid pro quo and in course or furtherance of business are exigible to GST. Further, barter transactions (benefits in kind) are also covered in scope of supply. Hence, GST is leviable on non-monetary benefits (other than gifts) received by trade partners from OEMs as result of quid pro quo between them i.e. when trade partners undertake any activity for OEMs and receive non-monetary benefits for undertaking such activity.
• Post-supply discounts given by OEMs to trade partners are not provided as result of quid pro quo and are part & parcel of original sale transaction. Hence, they stay outside the ambit of GST. Moreover, since these discounts are given in cash, these are also not covered by Section 194R.

Basis above discussion, taxability of some common transactions under Section 194R and GST law can be summarised as under:

NITYA Comments: For any benefit to be exigible to GST, it must qualify as consideration for supply under Section 7 of the CGST Act. Introduction of a provision in another law cannot bring new taxability under GST law. Hence, this provision will not have far reaching consequences from GST perspective.

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