It's a tussle that does not augur well for millions of Central government employees who are waiting for the arrears of the 6th Pay Commission award. The disagreement is over how to tax the arrears of the Pay Commission award; 40% of which will be received by employees with the next month's pay.

The taxation of the arrears will depend on how much of the arrears will be paid out this fiscal. As per the notification and the announcement in the Cabinet, only 40% of the arrears from January 1, 2006 will be paid out.

The Central Board of Direct Taxes has the Expenditure Secretary’s locus standi on talking on taxation issues. Also as per the Income Tax Act, not only that part of income tax which is received, but that part of income is also taxed which is accrued. So one may receive 60% of the arrears maybe in the next fiscal but that doesn’t stop the Income Tax Act from taxing the arrears. So there is this major disagreement there.

The tax experts have also brought in something called the Accounting Standard 9 which talks about revenue recognition. They are also in an agreement with the CBDT saying the revenues are recognized on an accrual basis in India; not so much in cash spaces. This essentially means, even if you receive 60% of the arrears next year, you could be taxed on that. The jury is still out on that and the fate of millions of government employees hangs in balance. If this tussle is not sorted out, it may have serious political repercussions.