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You can go tax-free at your employer's cost
December, 25th 2007
Good news for salaried taxpayers, especially expatriates working in India. In case your employer picks up your tax liability, this perquisite of tax-free salary will not be taxed again. At present, if your employer picks up the tax bill, that advantage is taxed again. For example, if your salary is Rs 100 and the employer pays Rs 30 for tax, your tax liability goes up to Rs 39 (30% of 130), i.e. 39% against 30%. If the employer picks up this additional 9% also, that benefit is again to be added to income.

A special bench of the Income Tax Appellate Tribunal (ITAT) , headed by ITAT president Vimal Gandhi, held that this perquisite is exempt from tax under Section 10 (10C) of the Income-Tax Act, which means that it cannot be taxed again. Therefore, if an employer picks up the income tax tab of the employee, this benefit of tax-free employment will not be taxed again. This ruling was given in the case of RBF Rig Corp LLC, USA.

Since the special bench ruling is equally applicable to Indian companies as well as Indian employees, this ruling could go a long way in boosting tax-free employment practices in India. So far, the concept of tax-free salaries to Indian employees has not been popular as there was additional tax burden inherent in such schemes. With this ruling, such schemes will become tax neutral and hence, more attractive. The special bench was set up to clear the confusion created by contradictory verdicts given by various benches on the same.

SK Tulsiyan, one of the counsels in this case, said the ruling was in tune with global best practices and will have a major impact on the taxation of expatriate employees. When compensation packages for expatriates are drawn up, the tax liability of employees is invariably taken into account because the expatriates expect to receive the payments without any tax complications. Now that the benefit of tax-free employment does not have tax implications, it will be a win-win situation for employers as well. Senior chartered accountant TP Ostwal said: This is the correct interpretation of relevant law.

This is precisely what the 2002 amendment in the Income-Tax Act meant, but overzealous income tax officers did not give true effect of the provision, said Sanjiv Jain, a New Delhi-based tax consultant, handling tax matters on half a dozen foreign airlines and other MNCs. The facts of the case Alnasser Rahim, an employee of RBF Rig Corp LLC, was working as a technician on ONGCs oil rig and his employer agreed to bear Indian income tax in respect of his income from employment at ONGCs facilities.

The employee claimed that this tax perquisite was not a perquisite by way of monetary payment and hence cannot be taxed again. The employee invoked Section 10 (10CC) of the I-T Act, which says the tax paid by the employer, on a perquisite in respect of perquisite not provided by way of non-monetary payment, will not be included under taxable income.

Finance Act 2002 amendment in the I-T Act stipulates that exemption will be granted 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, 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.

However, the income tax department followed this line. Payment of tax on behalf of the employer was a cash payment, and, therefore, cannot be covered by this exemption. ITAT did not agree. It held: It is not money, which is paid to the assessee when taxes are paid on his behalf.
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