The new section mandates a person providing any benefit to a resident to deduct a tax at source of @10 per cent of the value or aggregate of such benefit before providing such benefit
Loyalty/rewards points earned on a credit card and online credit which expire may not attract new Tax Deducted at Source (TDS) norms coming into effect from next month. However, it will be applicable if these are earned through business or profession.
According to the Reserve Bank of India, as on April 30, the credit cards issued in India are at 7.51 crore, while that of mobile wallets is over 247 crore.
The Finance Act 2022 inserted a new section 194R in the Income-tax Act, 1961, with effect from July 1. The new section mandates a person responsible for providing any benefit or perquisite to a resident, to deduct a tax at source @10 per cent of the value or aggregate of such benefit or perquisite, before providing such benefit or perquisite. The benefit or perquisite may not be convertible into money, but should arise either from carrying out business or from exercising a profession, by such resident. However, the new norm will apply only when the value exceeds ₹20,000 in a year.
On June 16, the Central Board of Direct Taxes (CBDT) came out with detailed guidelines for removing difficulties related with the new norms. Though the guidelines provided relief to manufacturers, dealers and distributors by excluding sales discounts, cash discounts and rebates from the ambit of new norms, however TDS will be applicable on free samples, including that of medicine.
Apprehension is raised in some quarters that the loyalty points earned through spending on credit cards or credit available online with a sunset clause to be covered under TDS. Tax officials clarified that anything which falls under the definition of benefits or perquisite under the Income Tax Act will be covered under new norms.
Raghav Bajaj, Counsel with Khaitan & Co said that the primary condition for the new TDS obligation is that the receipt of the benefit or perquisite should arise from business or the exercise of the profession. “If this condition is not met, the TDS obligation will not trigger. Thus, in the case of loyalty points etc given by merchants, to assess the applicability of this new TDS levy, the context in which these points will be provided will need to be evaluated first to identify if it can be said to arise from a business or profession,” he said.
Reiterating these points, Aakansha Goel, Partner with T R Chadha & Co LLP, Provisions of Section 194R provide that TDS liability shall arise on any benefit or perquisite provided in a year above Rs 20,000 to a resident only when such benefit or perquisite arise from business or exercise of the profession by such recipient.
“When credit card companies or e-commerce operators provide loyalty points or online credit, etc., to its customers, it does not arise on account of any business or profession of such resident customers. Accordingly, no TDS liability shall arise u/s 194R. However, it should be ensured that such points, wallet money or online credit should not be on account of any business or profession carried on by such recipients,” she said.