Increasing globalization has increased the employment opportunities around the globe. Presently, the increase in the number of expatriate employees in India is quite evident. However, problems arise to these individuals of different nations because of different tax structure in the respective countries. For this, the employer enters into terms of employment with these employees in such a way wherein the applicable taxes in India is borne by the employer, which gives rise to tax neutralized agreement. However, Income Tax laws (section 192 of the Income Tax Act, 1961, 'Act') in India requires an employer to deduct tax at source at the time of payment of salary to the employee and hence, ambiguity exists in determining and taxable income and TDS mechanism. Therefore, in order to harmonize compliance of law with the terms of employment with these expatriate employees, following trend is generally seen among the employer: 1. Section 2(24)(iii) of the Act defines income as " income includes the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17".
2. Section 17(2) defines perquisites which are taxable in the hands of an individual as salary, sub-clause (iv) of which states that "any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee". Hence, when the tax is paid by an employer on behalf of an employee, it is an obligation which would have been payable by the employee and therefore, it is considered as a non - monetary perquisite taxable under sub-clause (iv) of clause (2) of section 17.
Uttarakhand High Court in the ruling of DIT v. Sedco Forex International Drilling Inchas clarified the above view.
Hence, it is clear that where tax of the employee is borne by the employer, such amount is treated as a perquisite in the hands of the employee by virtue clause (2) of section 17.
3. The mechanics in how this is carried out is:
Considering the cash salary of an employee of Rs. 100 and income tax rate to be flat 30%.
Particulars | Case 1: Computation in normal case | Case 2: Computation in case where tax has to be borne by employer |
Taxable Salary | 100 | 100 |
TDS @30% (in case 1) | 30 (30% of 100) | 30 |
Tax amount grossed up by non-portion and added to income as perquisite | 42.85 (30/70%) | |
Total salary after perquisites | 142.85 | |
TDS @30% (In case 2) | 42.85 (30% of 142.85) | |
Net Salary Paid | 70 | 100 |
In both the scenarios, the TDS return of the employer will reflect that:
Particulars | Case 1: Computation in normal case | Case 2: Computation in case where tax has to be borne by employer |
Total Taxable Salary paid to employee | INR 100 | INR 142.85 |
Total Tax deducted from salary of employee and deposited to Government Account | INR 30 (borne by employee) | INR 42.85 (borne by employer) |
Net Salary Paid to employee after TDS | INR 70 | INR 100 |
4. Now, as per clause 10CC of Section 10 of the Income Tax Act, 1961, in the case of an employee, being an individual deriving income in the nature of a perquisite, not provided for by way of monetary payment (non - monetary payment), within the meaning of clause (2) of section 17, the tax on such income actually paid by his employer, at the option of the employer, on behalf of such employee, is exempt in the hands of employee.
5.In other words, for non-monetary perquisites, employer has an option to directly deposit the tax amount on that perquisite and then, the same (tax on tax) in our case becomes exempt in the hands of the employee. That is, taxes paid by the employer can be added only once in salary (without grossing up). Therefore, tax on perquisites is not to be added again.
The above contention can also be clarified with the below example:
Particulars | No Exemption claimed under section 10(10CC) – Multiple Stage Gross up required | Exemption claimed under section 10(10CC) – Single Stage Gross up required |
Employee’s Taxable Income | 100 | 100 |
Tax paid by employer on employee’s income | 30 (30% on 100) | 30 (30% on 100) |
Tax on Tax paid by employer | 12.85 (30/70*30) | 9 (30% on30) |
Total Taxable Income | 142.85 | 130 |
Total Tax Paid to Government | 42.85 (142.85*30%) | 39(130 *30%) |
Total cost to employer | 142.85 | 139 |
Further, it is also imperative to note that in case, tax on non- monetary perquisite is directly paid by employer, such tax amount (being exempt in the hands of employee), disallowed in the hands of employer by virtue of section 40(a)(v) of the Act. Hence, in the above case, the employer will not get the deduction of Rs. 9.
Now, the question arises whether option of section 10(10CC) is beneficial for the company as a whole. An example below (AY 2018-19), considering a huge organisation where employs an expatriate employee with an agreed net of tax salary of INR 20,00,000.
Particulars | (10(10CC) not taken and tax on perquisite borne by employee | (10(10CC) taken and tax on perquisite borne by employer |
(a)Salary | 20,00,000 | 20,00,000 |
(b)Tax on above | 4,12,500 | 4,12,500 |
(c)Education Cess | 12,375 | 12,375 |
(d)Total Taxes (b+c) | 4,24,875 | 4,24,875 |
(e)Non-Monetary Perq u/s 17(2)(iv)) (Grossed up and benefit u/s 10(10CC) not given to employees) | 6,14,870 (4,24,875/.691) | |
(f)Non-Monetary Perq u/s 17(2)(iv)) (Not Grossed up since exempt in the hands of employee u/s 10(10CC) and tax on perquisite is borne by employer | 4,24,875 | |
(g)NewTaxable Income | 26,14,870 | 24,24,875 |
(h)TDS Liability | 6,14,870 | 4,24,875 |
(i)Payable to employee | 20,00,000 | 20,00,000 |
(j)Tax paid to government as TDS | 6,14,870 | 4,24,875 |
(k)Tax on perquisite paid directly by employer (192(1A)) | 1,31,286 (30.9% on 4,24,875) | |
(l)Total cash outflow of tax (j+k) | 6,14,870 | 5,56,161 |
(m)Disallowed in the hands of employer | 1,31,286 | |
(n)Tax impact on the above (considering max rate applicable on a company 34.608%) | 45,436 (1,31,286*34.608%) | |
(o) Employee Benefits allowable in the hands of employer (Exp claimed in P&L) (i+l) | (26,14,870) | (25,56,161) |
(p)Tax savings on above (@34.608%) | 9,04,954 | 8,84,636 |
(q) Net Cost to the company (o+p+n) | 17,09,916 | 17,16,961 |
(r) Net Loss if 10(10CC), ifavailed | 7,045 |
Hence, it can be seen from above that where tax rate of the company is more than the average tax rate of the employee, such a case is less beneficial in the hands of the company. Hence, should be considered each time while evaluating the applicability of 10(10CC).
The author can also be reached at rohitjain10011995@gmail.com
