Now TDS on free physician samples, Doctors under Income Tax net

New Delhi: In what is going to bring a major setback to the traditional pharma marketing of providing free physician's samples as well as various other freebies to doctors, the new Government of India guidelines are going to hold doctors accountable for such benefits by being liable towards a 10% TDS on the value of freebies received. Besides free samples, this will also be applicable to various kinds of other freebies which may include foreign flight tickets or free Indian premier League (IPL) tickets in the course of business and more.

The Central Board of Direct Taxes (CBDT) issued the guidelines clarifying the applicability of the newly inserted section 194R in the Income-tax Act, 1961 effective July 1, 2022. 

The new section 194R mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source @ 10% of the value or aggregate of value of such benefit or perquisite, before providing such benefit or perquisite. The benefit or perquisite may or may not be convertible into money but should arise either from carrying out of business, or from exercising a profession, by such resident. 

As per the government. the benefits/perquisites on which tax is required to be deducted under section 194R of the Act clearly include the situation When a person gives medicine samples free to medical practitioners. It goes on to explain, that this will be there whether its directly given to a doctor, who may be an employee or even a consultant at a hospital

To illustrate, the free medicine sample may be provided by a company to a doctor who is an employee of a hospital. The TDS under section 194R of the Act is required to be deducted by the company in the hands of hospital as the benefit/perquisite is provided to the doctor on account of him being the employee of the hospital. Thus, in substance, the benefit/perquisite is provided to the hospital. The hospital many subsequently treat this benefit/perquisite as the perquisite given to its employees (if the person who used it is his employee) under section 17 of the Act and deduct tax under section 192 of the Act.

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. It is further clarified that the threshold of twenty thousand rupees in the second proviso to sub-section (I) of section 194R of the Act is also required to be seen with respect to the recipient entity.

For Consultants, it goes on to explain

Similarly, the tax is required to be deducted under section 194R of the Act if the benefit or perquisite is provided to a doctor who is working as a consultant in the hospital. In this case the benefit or perquisite provider may deduct tax under section 194R of the Act with hospital as recipient and then hospital may again deduct tax under section 194R of the Act for providing the same benefit or perquisite to the consultant. To remove difficulty, as an alternative, the original benefit or perquisite provider may directly deduct tax under section 194R of the Act in the case of the consultant as a recipient.

How is the valuation of benefit/perquisite required to be carried out?

The valuation would be based on fair market value of the benefit or perquisite except in following cases:-

(i) The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. In that case, the purchase price shall be the value for such benefit/perquisite.

(ii) The benefit/perquisite provider manufactures such items given as benefit/perquisite, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite. It is further clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R of the Act.

Threshold of validity and Onus of Tax Liability

While the guidelines note that deduction is not required to be made, if the value or aggregate of the value of the benefit or perquisite provided or likely to be provided to the resident during the financial year does not exceed twenty thousand rupees, but goes on to add that it has to be deducted by the person providing the benefit, in this case, either the hospital or the pharma comapny. 

"Section 194R of the Act casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source @ 10%. There is no further requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable," the guidelines add

The exception to the rule for doctors

The provision of section 194R of the Act shall not apply if the benefit or perquisite is being provided to a Government entity, like a Government hospital, not carrying on business or profession, the guidelines add

What else falls within the scope of section 194R?

Even capital assets given as benefits or perquisites are covered within the scope of Section 194R. Also, section 194R shall apply when a person gives incentives, other than discount or rebate, which are in cash or kind e.g., car, TV, computers, gold coin, mobile phone, free ticket or when a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets.

What is excluded from Section 194R?

The 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 since that would put the seller into difficulties.

The Move is going to cast a severe dent on the traditional pharma marketing practices across the country. The applicability of the new provision is likely to make handing out of freebies and even free samples to doctors less attractive, which comes as a major setback for pharma companies.