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NEW DELHI: Doctors and social media influencers are among those who will be subject to a new rule which mandates a 10% tax deducted at source (TDS) on freebies they receive from businesses for sales promotion.
A set of guidelines from the Central Board of Direct Taxes (CBDT) explains the circumstances in which the new tax deducted at source (TDS) provision which kicks-in from 1 July will apply. The provision was introduced in the Finance Act of 2022 to widen the tax base and to ensure that those who benefit from such sales promotion expenditure by businesses report it in their tax returns and pay tax on what the benefit is worth.
Social media influencers will liable to pay TDS if the equipment given for them as part of marketing efforts by a company is retained by the person. TDS will not apply if it is returned to the company, CBDT said.
“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 discount, 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.
However, the situation is different when free samples are given. The relaxation does not apply to free samples. The instances, when TDS would apply include perquisites in cash or in kind such as car, television, computers, gold coin, mobile phone, foreign trips and free tickets for events given to promote sales.
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 in the hands of 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 said.
“While the CBDT circular provides relief to manufacturers, dealers and distributors by excluding tax to be withheld on sales discount, cash discount and rebates, applicability of withholding tax provisions to free samples will have a wide impact. Several aspects such as the definition of benefit or perquisite, withholding tax on loyalty points, wallet money or online credit which expire, etc. still remain unaddressed. These aspects may require taxpayers to take positions in absence of specific clarification," PwC said in an analysis.
