Hundreds of top Indian and multinational companies have to contend with a significant tax implication for the next quarter as the government is unlikely to amend the Finance Act 2009 in the run up to the general elections.
The issue at stake is how to tax the retirement funds of employees of over 2,000 Indian and multinational companies. Companies facing the dilemma include Hewlett Packard, Motorola, American Express, Daimler Chrysler, HDFC Bank, Ranbaxy Laboratories, Bharat Heavy Electricals Ltd, Maruti Suzuki and British Airways.
These companies and others manage their own provident fund trusts that operate according to Employees? Provident Fund Organisation guidelines. In Budget 2006-07, the then finance minister P Chidambaram had asked these trusts to get a fresh exemption certificate from the labour ministry to retain the tax benefits granted for retirement fund contributions under the Income Tax Act, 1961.
To make it easy for the companies to get the certificate, the finance ministry had extended the original deadline through the last two Budgets. But it left the March 31, 2009 deadline untouched in interim Budget 2009, despite requests from the labour ministry for another extension.
The Central Board of Direct Taxes, the tax administration arm of the finance ministry, has said it could not continue this exemption as the interim Budget did not allow amendments to the Finance Act. ?Any amendment to the Finance Act can be done only in the full Budget, which will be announced in June or July after the new government is formed,? an official said.
Meanwhile, the companies have to make provisions for the tax liability, often running into several crore rupees when cash inflow is at a premium. All past and current contributions to these trusts would also be liable for tax deduction at source.
While CBDT told companies that it might consider granting a fresh extension with retrospective effect in the main Budget, some of the companies have sought legal opinion on the matter.
The options before them include approaching both the provident fund authorities and the field formations of CBDT to explain that although they have applied for the approval, they are yet to get it; so their tax payments should be deferred.
If this doesn?t work out, firms have been advised to approach the courts through a writ petition and demand a stay. Some labour unions could also follow the same course of action.
Alarmed by the implications of the withdrawal of tax benefits to the trusts, at least two employer representatives on EPFO?s Central Board of Trustees have shot off missives to the rest of the board proposing that a blanket clearance be given to all such trusts so that their tax benefits can continue.
?In case the PF authorities are not geared up to clear the backlog, then the income tax department must continue the exemption to India Inc,? said Amitabh Singh, tax partner, Ernst & Young.
Many companies have fallen back on the earlier practice of getting exemption certificate from the labour ministry. The ministry has cleared over 200 such applications in recent weeks. But even if it grants approval to 500 odd pending cases, some companies would need additional clearance from state governments, for which the time line is too thin.