Loyalty points, wallet money or online credit shall not attract TDS provided they are not earned in the course of a business or profession


Loyalty points/rewards earned on expiring credit card and online credit may not attract the new withholding tax (TDS) standards that come into effect next month. However, it will be applicable if these are earned through a business or profession.

According to the Reserve Bank of India, as of April 30, 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 into the Income Tax Act 1961, with effect from 1 July. The new article obliges a person responsible for providing an advantage or an indirect advantage to a resident to deduct a withholding tax @ 10 per cent of the value or the whole of this advantage or this advantage, before providing this advantage or this benefit. The benefit or indirect advantage may not be convertible into money, but must arise either from the exercise of a commercial activity, or the exercise of a profession, by this resident. However, the new standard will only apply when the value exceeds ₹20,000 per year.

On June 16, the Central Board of Direct Taxes (CBDT) issued detailed guidelines to eliminate difficulties with the new standards. Although the guidelines have relieved manufacturers, resellers and distributors by excluding sales rebates, cash rebates and rebates from the scope of the new standards, the TDS will still apply to free samples, including those medication.

Some are concerned that loyalty points earned by spending credit cards or credits available online with a sunset clause are covered by TDS. Tax officials have clarified that anything that falls under the definition of benefits or perquisites under the Income Tax Act will be covered by new standards.

Raghav Bajaj, lawyer at Khaitan & Co, said the main condition of the new TDS obligation is that the receipt of the benefit or perquisite must arise from a commercial activity 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 tax, the context in which these points will be provided will first need to be assessed to identify whether it can be said to derive of a business or profession,” he said.

Reiterating these points, Aakansha Goel, Partner at TR Chadha & Co LLP, the provisions of Section 194R provide that TDS’s liability arises from any benefit or advantage given in a year above Rs 20,000 to a resident only when such benefit or benefit arises from a business or the exercise of the profession by such recipient.

“When credit card companies or e-commerce operators provide loyalty points or online credits etc. to their customers, it does not arise from any activity or profession of those resident customers. Consequently, no liability of TDS can be engaged under 194R. However, care should be taken that these points, wallet money or online credit are not linked to any business or profession carried out by these recipients,” she said.

Published on

June 19, 2022


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