Credit card loyalty points, money in the wallet so as not to attract TDS

Loyalty points / rewards earned by credit card and online credit that expire may not attract new withholding tax rates (TDS), which take effect next month. However, it will be applicable if they are earned through a business or profession.

According to the Reserve Bank of India, as of April 30, credit cards issued in India are worth 7.51 kroner, while that of mobile wallets is over 247 rupees.

The Finance Act of 2022 introduced a new section 194R in the Income Tax Act of 1961, which enters into force on 1 July. The new section obliges a person responsible for granting any benefits or privileges to a local person to deduct withholding tax @ 10 per cent of the value or totality of such benefit or privilege before granting such benefit or privilege. The benefit or privilege may not be converted into money, but it must result either from doing business or from pursuing a profession by such a resident. However, the new norm will apply only when the value exceeds 20,000,000 in one year.

On June 16, the Central Council for Direct Taxes (CBDT) issued detailed guidelines to address the difficulties associated with the new rules. Although the guidelines provide relief to manufacturers, traders and distributors, excluding sales discounts, cash discounts and discounts from the scope of the new rules, TDS will be applicable to free samples, including medicines.

In some quarters, there are fears that loyalty points earned by spending credit cards or credit available online with a termination clause should be covered by TDS. The tax authorities clarified that everything that falls within the definition of benefits or relief under the Income Tax Act will be covered by new rules.

Raghav Bajaj, an adviser to Khaitan & Co, said the main condition for the new obligation for TDS is to receive compensation or a privilege to derive from doing business or practicing the profession. “If this condition is not met, the TDS obligation will not be triggered. Thus, in the case of loyalty points, etc., provided by merchants to assess the applicability of this new TDS fee, the context in which these points will be granted will have to be assessed first in order to find out if it can be said to come from a business or a profession, “he said.

Reiterating these points, Aakansha Goel, partner with TR Chadha & Co LLP, the provisions of Section 194R provide that liability for TDS arises for any benefit or privilege granted over Rs 20,000 per year to a local person only when such benefit or advisory condition arises from the 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, this does not arise due to any business or profession of such local customers. Accordingly, no liability arises for TDS u / s 194R. However, it must be ensured that such points, wallet money or online credit must not be at the expense of any business or profession pursued by such recipients, “she said.

Posted on

June 19, 2022

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