As a normal practice, it is the employee who bears the tax on the salary earned by it, while the employer withholds such tax on salary and deposits it with income tax authorities. However, sometimes employees move across borders and work in different tax jurisdictions. In such a situation, it is a global practice for employers to take over the tax obligation of the employees in the new jurisdiction. Such an assurance guarantees employees a definite pay package irrespective of the tax rates or tax situations applicable in the new jurisdiction.
Taxability of perquisites
As per provisions of the Indian Income tax Act, 1961 (hereinafter referred to as “the Act”), any sum paid by the employer, in respect of any obligation which would have been payable by the employee, is taxable as a perquisite in the hands of employee.
Accordingly, where the taxes of the employee are borne by the employer, the taxes are considered as an additional benefit (perquisite) and are taxable in the hands of the employee.
Exemption u/s 10(10CC) of the Act
As per section 10(10CC) of the Act, tax paid by employer (on behalf of employee) on non-monetary perquisites will be exempt from tax in the hands of employees.
However, the tax on such non-monetary perquisites paid by the employer is not a deductible business expenditure in the hands of the employer by virtue of Section 40(a)(v) of the Act.
Therefore, if any employer, at his option, paid tax on non-monetary perquisite, such tax is non deductible in computing business income of such employer.
Issue before the judiciary
In the absence of definition of non-monetary perquisite, the tax authorities have been denying the benefit of Section 10(10CC) on the grounds that taxes borne by the employer do not qualify as non-monetary perquisite.
Since no direct payment is made to the employee but an obligation of the employee is borne by the employer, there is a viewpoint that the taxes borne by the employer could be considered a non-monetary perquisite.
Inspite of favorable ruling of special bench of the Delhi Tribunal in the case of RBF Rig Corporation, the tax authorities had continued to disallow the claim of exemption of tax on tax paid by employer.
However, the Uttarakhand High Court in the case of Sedco Forex International Drilling Inc.ruled that while the tax paid is certainly a monetary payment, the same is not paid to the employee. Such payments are perquisites to be excluded from the income of the employee under Section 10(10CC) of the Act.
The decision of the Uttarakhand High Court has brought clarity and relief to employers who have negotiated a net of tax salary packages for employees. Though the exemption claimed under Section 10(10CC) is not permitted as a deductible expense while computing the taxable income of the employer, employees will not be liable to pay tax on tax paid by the employer, leading to overall savings in tax costs.
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CA Ruchika Gupta
AKGVG & Associates