💸 Yet Another Tax On Our Income?
You may not have realised but the world changed on July 1, making your pockets lighter and the government's heavier. And everything else a little bit more complicated. Here's how.
5 years back India introduced GST to simplify taxes.
"One Nation, One Tax" was the motto it wanted to implement.
And while it may have solved this problem for indirect taxes, a new section in the income tax, which has become the talk of the town, is threatening to make our direct tax payments very very complex.
Here's what LinkedIn has to say about this:Â
What is this new code you ask?
It is section 194R of TDS which became enforceable from earlier this month.
🤓 What is TDS?
Before we get into this specific new section of TDS, let's get clarity on what TDS or Tax Deducted At Source is.
TDS is just income tax that is pre-deducted right at the source of the income.
Which is why your credited salary is always a little less than what was promised. But why?
Well, there are two main reasons for it.
You see, one of the sources of revenue for the government is the income tax. But if all of us were to pay it during a one-month period towards the end of the year, it could keep the government cash-starved for the rest of the year.
But if the government keeps getting bits and pieces of this income tax throughout the year, cash flow management becomes easy.
Also, it is way easier to track whether companies have deposited tax or not rather than to check whether you and I and lakhs of others like us have done so.
And now this pre-deducted tax will also be applicable on all the gifts and promotional packages that influencers get. Umm, how?
📜 The New Section
You see, Section 194R of TDS, which has become applicable from July 1, states that if a company is providing any benefits or "perks" to anyone for business purposes, they first need to deduct 10% tax from the original value.
But how can you deduct tax from a gift package or products given to influencers to endorse?
Simple, if a company is sending a PR package worth Rs. 50,000, the influencer in question will have to pay Rs. 5,000 up front to get it.
Yes, influencers' days of getting free stuff are over (Here's how they paid taxes earlier).
They can, however, return products to the company once they are done endorsing to avoid the tax.
However, most products that influencers get, like skincare products or makeup, can't be returned and need to be used by them.
So, the whole influencer economy could be in trouble because of this law. It will negatively impact many small and upcoming companies that relied on influencer marketing to get word of their brand out there.
Influencers may be skeptical of accepting any and all freebies now that they have to pay for them.
They may even start charging to accept promotional packages.
This will also impact budding influencers who are hoping to grow and create a name for themselves.
But this new section isn't just targeting influencers.
Even doctors and consultants will be impacted.
You see, doctors often receive free medicine samples to promote them.
But now these samples won't be free: doctors will have to pay TDS on them.
Okay, ReadOn. But why consultants?
You see, every time they travel for their clients, they pay the bill but the client reimburses it and they get to enjoy the perks.
Sounds great, right?
But well, companies list this as a business expense to reduce their taxable income.Â
From the government's point of view, the reimbursement that they give the consultant is an additional income for them.
But because consultants see it as reimbursement, they don't report it and are not taxed for it.
So, the government gets less tax from companies (because they have reported it as an expense) and no tax from consultants (because they don’t report it either).
That's what this code is trying to change. It is trying to widen and deepen the government's tax base by taxing income that was earlier slipping through its hands.
But this will complicate things.
Most companies somewhere or the other provide reimbursements to contractors whom they work with.
All of this will now come with an added cost for them. Plus, the contractors will also have to keep a track of this "additional income" which is not really an income and add it to their books. If not, they could face tax liability for non-disclosure of income. However, there is little clarity on this point.
Not just that, from an implementation point of view also, this could be nightmare.
Many companies will have to set up a whole team to keep track of reimbursements.
This will create a lot of hassle and could end up costing them quite a bit of money.
And who will be the most impacted? MSMEs. They will probably have to team up with other MSMEs or opt for freelancing services to comply with this new law.
However, there are a few ways in which companies can avoid this hassle.
They could get corporate memberships of Uber so that travel costs don't have to be reimbursed.
They could also ask consultants to bill expenses directly in the company's name.
This could minimise compliance issues but will probably not end them.
After all, not every expense will be billable in nature.
Additionally, does the government have the bandwidth to deal with all this extra compliance? Will it really be able to track whether companies are actually complying with this or not?
All in all, the law may be helping the government earn a little extra money. But at what cost?Â
âš¡ In a line: The government has introduced a new TDS section to increase and widen its tax base but this may become a major compliance issue.
💡Quick question: Do you think the government was justified in introducing this section and will it be able to actually enforce this?
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