Loyalty programs have been a popular marketing tool for businesses to retain channel partners, customers, and foster brand loyalty. However, the introduction of Section 194R in the tax regulations has profoundly impacted the effectiveness and viability of loyalty programs.

In this blog, we will explore what Section 194R entails, its main associated rules, the problems that brands and channel partners face, and potential solutions to mitigate the challenges.

Understanding Section 194R:

Section 194R is a provision in the tax regulations that aim to deduct TDS on payment of rewards as mentioned in specific loyalty programs. It applies to brands that offer rewards and incentives as part of their loyalty programs. This provision intends to ensure tax compliance and prevent any potential misuse or evasion of tax liabilities.

Main Rules of Section 194R:

  • Tax Deduction at Source (TDS)
    Section 194R mandates that the person responsible for making the payment to the recipient under the loyalty program shall deduct a tax of 10% (if the pan card of the receiver is available) or 20% (if not) before making the payment. 
  • Threshold Limit
    If the total payment amount to a recipient doesn’t exceed Rs.20,000 during the financial year, TDS is 0%. 

Problems Faced by Brands and Channel Partners

  • Increased Administrative Burden
    Section 194R has imposed additional administrative tasks, such as maintaining records of payments, calculating and deducting tax, and filing TDS returns. It has increased the workload for businesses and channel partners.
  • Impact on Program Viability
    Due to this rule, channel partners have to include rewards in their income, making them more liable to pay extra income tax, making their effective earnings less than they used to be. It affects the motivation and engagement of channel partners, thereby undermining the effectiveness of loyalty programs.
  • Complex Compliance Requirements
    Complying with the lengthy and complex rules and regulations of Section 194R can be challenging for businesses, especially those operating in multiple states or regions. Understanding the nuances of tax deductions and thresholds can lead to confusion and errors.
    For example, let’s take a scenario where you want to know if you should deduct taxes under 194R. For that, you have to read Sections 192 and 195, and there are two more conditions where you will be exempted.  

Solutions to Overcome the Challenges

  • Turn Rewards into Experience
    Brands should get used to offering rewards in the form of experiences. They offer their channel partners exclusive excess to events, training sessions, and some form of Virtual Digital Assets. This way, channel partners will be rewarded for their hard work without raising their income tax slab.
  • Collaborate with Experts
    Brands should seek guidance from experts and professionals who specialize in loyalty program management who can help them navigate the complexities of Section 194R. Their expertise can ensure compliance while maximizing the benefits of loyalty programs.
    Almond Solutions, a leading platform for loyalty program management, offers a comprehensive suite of tools to streamline these tasks.
  • Embrace Technology and Automation
    Businesses can leverage technology solutions to automate tax deduction calculations, maintain accurate records, and simplify compliance processes. It will help them to streamline the process. It resolves the internal problems but not the external ones, where channel partners are becoming unengaged with brands or shifting towards local brands that don’t follow the tax code too seriously.
  • Enhance Program Value Proposition
    Brands and channel partners can counter the impact of tax deductions by enhancing the value proposition of their loyalty programs. It can include offering personalized rewards, exclusive privileges, and tailored experiences to incentivize customer participation.
  • Threshold Monitoring
    Implementing a system that monitors the threshold limit for TDS applicability helps businesses stay compliant. This way, businesses can offer rewards up to the threshold of Rs.20,000 and then, after that, can get rewards in the form of experience and exclusive excess. If a brand wants to adopt this solution, it should track the live rewards distribution.
  • Create a TDS Help desk
    Organizations can specify a team that resolves the channel partners’ issues as soon as informed. This team should be well informed about the programs and regulations like TDS and income tax. They can also use this team to promote loyalty programs and schemes too.
    Organizations can always outsource this task to their loyalty program management company. Almond Solutions has been doing this for its clients for many years.

Section 194R has undoubtedly presented significant challenges for brands and channel partners in maintaining effective loyalty programs. However, with proactive measures, collaboration with experts, and leveraging innovative platforms, businesses can navigate these challenges and revive the essence of loyalty programs. 

Lastly, suppose a brand doesn’t want to have too many headaches. In that case, it can outsource the loyalty management to a company leading in the segment and constantly taking bold moves to ensure growth in engagement and revenue, like Almond Solutions.

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