Tax talk: Clarity needed on TDS for products given for free to social media influencers

By Neeraj Agarwala

Tax Deducted at Source (TDS) on consideration paid in kind has been a subject matter of litigation. The tax department has consistently sought to disallow expenses incurred by a taxpayer towards gifts provided to business associates. It alleged these gifts are in lieu of professional fees, paid in kind, and therefore the taxpayer should have deducted and deposited TDS under Sections 194J /194C of the Income Tax Act. However, various courts have held otherwise and observed that non-monetary considerations are not covered under Sections 194J/ 194C.

It is pertinent to note that these non-monetary considerations are and would continue to be taxable in the hands of the recipient. What was debated was whether the TDS provisions cover non-monetary considerations. Thus to widen the tax base and ensure compliances by such recipients, a new section, 194R, is proposed to be inserted vide Finance Bill, 2022. Let’s take a look at the proposed amendment:

From whom will TDS be deducted?

Under Section 194R, it is proposed that TDS is to be deducted from a resident, who has received any perquisite or benefit arising from business or the exercise of a profession. What we note here is that residence-based taxation has been applied by the ministry. That is, the place of receiving the benefit or perquisite can be in India or outside India but as long as the recipient is a resident in India, TDS will be applicable.

Who is liable to deposit TDS?

The liability to deduct and deposit taxes has been placed on any person (resident or non-resident) providing benefit or perquisites to a resident. As per the proviso to section, in a case where the benefit provided is wholly in kind or partly in cash and partly in kind, but the part in cash is not sufficient to meet the TDS liability, then the person responsible for providing such benefit shall before releasing the benefit, ensure that tax is paid in respect of such benefit. That means if the person receiving the benefit discharges the tax liability on such benefit by way of advance tax, the payer would no longer be required to deposit any further taxes and can freely release the benefit.

What is a ‘benefit or perquisite’?

The  term ‘perquisite’ is currently defined under Section 17 which includes various monetary and non-monetary emoluments. Section 194R does not define ‘perquisite’ but states that TDS will be applicable irrespective of whether such considerations are convertible into money or not. Without a proper definition of the term ‘perquisite’ or ‘benefit’, what constitutes a perquisite or benefit would lead to tax litigations. For example, whether free supplies would constitute a benefit or not and whether TDS would be required on such value remains to be seen.

How much TDS is to be deposited?

TDS is required to be deposited at the rate of 10% of the value or aggregate of the value of such benefit or perquisite. However, the question of how to value the benefit or perquisite remains open to dispute.

In social media marketing, there are many influencers that provide marketing services for collaboration. Under the provisions of the proposed Section 194R, TDS will now be required to be deducted and deposited by the companies giving their products free to these influencers. With the introduction of Section 194R, whether the manner in which these influencers receive consideration change or not, we will need to wait and see.

The writer is partner, Nangia Andersen LLP, Inputs from Neetu Brahma