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Finmin divided over tax on pay arrears
September, 04th 2008

Confusion prevails on the tax treatment of the pay arrears that Central government staff are set to get as part of their latest wage revision. While tax experts and the income tax department maintained that the entire arrears are to be taxed this fiscal (even though they would get only 40% of the arrears this fiscal), another section of the finance ministry said that they would be taxed for only what they get this year. The government had decided to pay 40% arrears of their increased salaries this year and the rest next year to reduce the burden on the exchequer.

At a briefing on the implementation of the latest wage rise for central government staff, an official of the finance ministry said, the instruction to the ministry is to deduct tax only when it is paid. The officials, however, declined to speak on record. Government instructions issued on August 30 regarding fixation of pay and payment of arrears consequent upon the implementation of the Sixth Pay Commissions recommendations, clearly states that in authorising the arrears, income tax as due may also be deducted and credited to the government. Generally speaking, income earned in a year is taxed in that particular year only, said the official. Sources in the income tax department, however maintained that law as it stands today, provides for deducting the tax on the entire amount when it is allowed, irrespective of when they actually get the money. They said that the supreme court had upheld the provision regarding this in a case of CIT versus L W Russel 53ITR91.

Income Tax Act says that any arrears of salary paid or allowed to him in the previous year, if not charged to income-tax for any previous year, can be charged to income-tax under the head salaries. The court had in its verdict said the expression allowed is of wider connotation and any credit made in an employees account is covered by it.

It is equivalent to find/taking into account/set apart/granted and implies that the right is conferred on the employee in respect of the perquisite, it had said. The government had last month announced an average increase of 21% in the wages of employees.

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