Income Tax 21 Jan,2020
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Pre-budget 2020: shower tax benefits on private employees
Meenakshi SubramaniamFormer IRS Officer

Recently, a private employee was fed up with paying income tax. He prayed to Lord Brahma, who appeared before him.

The Lord asked: "What's your wish?"

The employee said: "In my next life, I want to be…"

Lord Brahma cut him short, "In your next life, you would be a rich man."

The private sector employee said: "No. No. I want to be a government servant."

The private employee fights own private battles, while the Budget every year, bypasses him. Whereas government employees grab goodies, he suffers privations, in private. Will Budget 2020 give tax benefits to the grossly-discriminated private sector employees ?

Big one-time incomes like leave encashment are taxed, in case of private employees, while government servants get full exemption. There are other anomalies too, as for example, death-cum-retirement gratuity is exempt for those working in local authorities offices, not statutory corporations. Though they work hard, or even more harder than those in government service, the private sector employees are taxed higher. A court ruling went to extent of saying:

"Classification for purposes of taxation or for exempting from tax with reference to the source of the income is integral to the fundamental scheme of the Income-tax Act. Indeed, the entire warp and woof of the 1961 Act has been woven on this pattern." [Income Tax Officer, Shillong And ... vs N. Takim Roy Rymbai Etc. Etc (103 ITR 82)]

In Kamal Kumar Kalia v Union of India (111 taxmann.com 409), Delhi HC held that retired employees of PSUs and nationalised banks cannot get full tax exemption on leave encashment after retirement/superannuation under section 10(10AA). This is for the reason that employees of the Central Government and State Government form a distinct class and the classification is reasonable. "The Central Government and State Government employees enjoy a 'status' and they are governed by different terms and conditions of the employment."

PUT A STOP - TO THIS DISCRIMINATION

NATIONAL PENSION SCHEME (NPS)

Just in last Budget, Section 80CCD(2) was amended, hiking exemption of employer contribution from 10% to 14% of salary of central government employee. For private sector, the exemption remains at 10%, only. This increases tax of private employees.

Though a deduction of Rs. 1.5 lakhs under Section 80C and additional deduction of Rs. 50,000 under Section 80CCD are there for all NPS holders, the contribution specified for private employer is discriminatory.

GRATUITY

Gratuity is fully exempt for government servants, while private employees are mercilessly taxed. In fact, it is a part of salary which you receive as an appreciation from employer for the services offered to the company. One is eligible to receive gratuity only if one has rendered services for 5 continuous years or more to the organization.

Private employees, though covered under Payment of Gratuity Act, 1972 are taxed. The exemption granted is minimum of three conditions, below:

  i.  Actual gratuity received

 ii.  Rs. 3,50,000

  iii. 15 days salary for every completed year of service or part in excess of 6 months

Those not covered by Payment of Gratuity Act, 1972 have separate terms, where exemption is given for minimum amount in three conditions:

   i. Actual gratuity received

  ii.  Rs. 3,50,000

  iii. Half-month's average salary for every completed year of service

LEAVE ENCASHMENT

An organization grants leave to its employees and these leaves if unused can be carried forward. You can encash the unused accumulated leaves.

Government employees are fully exempt from paying any tax on leave encashment amount. Other employees get taxed and the exemption they get is least of following:

  a.  Actual amount received

  b. Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of actual service rendered

  c. 10 months Average monthly salary

  d.  Rs. 3,00,000

PENSION

Pension is a reward for past services of an employee. The payment is made by employer at the time of retirement. But, an employee can go in for Commuted Pension, which refers to a lump-sum pension payment received in lieu of periodic pension. Government employees are fully exempt from tax, if they go for commuted pension. But, others have to bear brunt of tax.

The other employees are divided into two categories, for purposes of taxation:

   i. Non-government employees who are in receipt of gratuity find that only 1/3rd of full value of commuted pension is exempt from tax. Technically, it means tax has to be paid on 2/3rd of value of commuted pension.

  ii. Non-government employees, not in receipt of gratuity face another kind of tax treatment. Only ½ of full value of commuted pension is exempt. One is required to pay tax on half of value of commuted pension.

ENTERTAINMENT ALLOWANCE

Only government employees get a deduction for entertainment allowance. Non government employees are not eligible.

The deduction from gross salary of the government employees shall be minimum of the below three limits given:

  ♦  Actual entertainment allowance received

  ♦  1/5th of salary exclusive of any allowance, benefit or perquisite.

  ♦  Rs. 5000

Entertainment allowance is an amount paid by an employer to employees for the purpose of hospitality of customers. After all, entertainment allowance may just be spent on tea, biscuits, snacks, refreshments and cold drinks, yet this is disallowed for private employees.

FOREIGN ALLOWANCES

Foreign Allowances or perquisites paid or allowed only to government employees posted outside India are fully exempt from tax.

RENT-FREE ACCOMMODATION (UNFURNISHED)

Government servants, when provided with rent-free unfurnished house, have to pay very little. Whereas the private employee has to pay a heavy tax, for this perquisite.

Government employees have to pay tax, equivalent to license fee, determined by the government, for allotment of houses. The amount is nominal.

Private employees are subject to an altogether different criteria. Where house is owned by the employer, the following shall be the taxable value of the perquisite:

   i. If the population exceeds 25 lakhs, then 15% of salary

  ii. If the population ranges between 10-25 lakhs then 10% of salary

  iii. In any other case, 7.5% of salary

Where house for private employee is taken on lease or rent by the employer, the taxable value of perk shall be irrespective of number of population and is:

  1. actual rent or

  2. 15% of salary

THE BIAS CONTINUES

Once, a private sector employee was asked at a function, "Who's your constant companion?" The majority thought he would name his wife. One even conjectured that he would take name of his dog. But, the private sector employee threw everybody off balance. He said, "Income Tax." Asked to elaborate, he said, "Well, income tax never leaves me. When I retire, it would still be there, because tax never retires, for private employees."

The puzzling argument advanced by income tax authorities is that Article 14 forbids class legislation, but does not forbid classification. What is required is that the classification must be based on a rationale relevant to the object which is sought to be achieved. A perfect mathematical nicety and perfect equality may not be possible in this process. Legislature is always free to recognise the degrees of protection that are required to be granted and it may confine the beneficial provision to such cases which it considers as the needy ones.

It is hard and impossible to believe that the government employees are the "needy" section of society. In case after case, the private employees have fought a lost battle:

• Arun Kumar & Others vs Union Of India & Ors [ Supreme Court Appeal (civil) 3270 of 2003 ]

The assessee contested the valuation of the perquisites relating to accommodation. For govt. servants, the license fee value was adopted and for him, a TISCO employee, it was 10 per cent or 7.5 per cent of the salary as the case may be. The Court held, "If two persons or two classes are not similarly situated or circumstanced, they cannot be treated similarly. To put it differently, Article14 prohibits dissimilar treatment to similarly situated persons, but does not prohibit classification of persons not similarly situated, provided such classification is based on intelligible differentia and is otherwise legal, valid and permitted."

The contention that Corporations, Companies and Undertakings are covered by the definition "State" within the meaning of Article 12 of the Constitution and they also must be granted all the benefits which had been granted to employees of the Government was also negatived by Court holding that application of Part XIV of the Constitution would be limited to Services under the Union and the States and not to other employees.

• P.N. Tiwari vs Union Of India ( 133 TAXMAN 482 )

The assessee charged that that rule 3 framed under section 295 by CBDT is not valid as it smacks of excessive delegation. Previously, car and house were not perks but CBDT now determines such matters. The Allahabad High Court turned down plea and stated there was no violation of Article 14 of Constitution. The classification of Central Government and State Government employees on the one hand, and the employees of the Public Sector and Private Sector cannot be said to be unreasonable.

The viewpoint of private employees have been demolished by arguments such as:

  ♦  In tax matters the government has a greater latitude to tax one category and not to tax other categories vide Anant Mills Co. Ltd. v. State of Gujarat AIR 1975 SC 1234; R.K. Garg v. Union of India 1982 U.P.T.C. 355 (SC); Malwa Bus Service v. State of Punjab (1983) 3 SCC 237; Amalgamated Tea Estate v. State of Kerala 975 U.P.T.C. 89, etc.

  ♦  A taxing statute is not open to attack on the ground that it taxes some persons or objects and not others - East India Tobacco Co. v. State of AP AIR 1962 SC 1733.

  ♦  The State can pick and choose objects, areas, persons, rates of tax, etc. - V. Venugopala Ravi Varma Rajah v. Union of India AIR 1969 SC 1094; Gopal Narain v State of UP AIR 1964 SC 370; TG. Venkataraman v. State of Madras AIR. 1970 SC 508, etc.

  ♦  The Legislature is competent to classify persons or properties into different categories and tax them differently (Raja Jagannath Baksh Singh v. State of Uttar Pradesh ( 56 ITR 169) .

SUMMING UP

Do you know the cash allowance for marriage, received by private sector employees is also fully taxable ?

The practice of picking and choosing whom to tax and whom not to tax must end. Differentiation must not turn into discrimination. The Budget offers a splendid opportunity to woo private employees.

Recently, a robot was sent from Mars to survey who were earnestly paying income tax on earth. In fact, Mars was truly in the red, having financial troubles and it wanted to learn who would yield maximum tax. The robot asked a private sector employee: "Do you pay income tax ? " He replied: "I pay a lot in income tax." The robot asked a bank employee. He said: "I pay some income tax." The robot approached a government employee and politely asked: "Do you pay income tax ?" Upon hearing this query, the government servant burst into laughter and replied: "I pay income tax, as little as possible. In fact, I only enjoy tax exemptions."