Covid-19 Lockdown: With no reimbursement, get ready to pay more tax

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Updated: April 27, 2020 1:57 PM

Aall the means of transport, entertainment etc are closed for general public due to the nationwide lockdown imposed to contain the spread of COVID-19.

Coronavirus Outbreak, Novel Coronavirus COVID-19, income tax, salary, allowances, perquisite, reimbursement, tax benefits, lockdown period, conveyance allowance, entertainment allowance, telephone allowance, taxable allowance, tax-free reimbursementReimbursement cannot be treated as an allowance or perquisite in the hands of the employee and hence is not a taxable income.

The salary structure of employees may have many components, like salary, allowances, perquisite, reimbursement etc. In fact, reimbursement is an expense incurred solely in performance of duties and no benefit can be derived by the employee out of the expense made by the employer. For example, paying an amount to an employee, who had spent the amount for hiring a car to perform an official duty, is treated as reimbursement.

So, reimbursement is paying back an employee the amount he/she has already spent for performing an official duty and cannot be treated as an allowance or perquisite in the hands of the employee and hence is not a taxable income.

As it is tax-free, many organisations allow its employees to take a part of some allowances – like conveyance allowance, entertainment allowance, telephone allowance etc as reimbursement on submitting proof of the amounts spent, to help employees reduce their tax liabilities.

For example, monthly telephone allowance of an employee is Rs 5,000 and his/her actual expense on telephone / mobile / broadband is Rs 1,000, which he/she may receive as tax-free reimbursement.

However, out of greed to save more tax, the employee may take connections for family members in his/her name, so that the employee may save more tax by getting more allowance amount as reimbursement by producing the bills.

Similarly, to get full conveyance allowance as reimbursement, an employee may give a self declaration that he/she traveled in auto rickshaws or taxi, where bills are not available.

However, this is not a good practice, as according to Dr. Suresh Surana, Founder, RSM India, “As per the section section 10(14) of the Income Tax Act and Rule 2BB under that section, it is evident that to claim the deduction of conveyance expenses while computing taxable salary income, it should have been actually incurred by the employee to perform his duties.”

While there will be no problem for the employees, who receive the allowances as part of taxable salary, but for the employees, who are not involved in providing essential services but receive the allowances as reimbursement, it would be a great problem, as all the means of transport, entertainment etc are closed due to nationwide lockdown imposed to contain the spread of COVID-19.

“If a company reimburses conveyance or entertainment expenses during the lockdown period, questions will naturally be raised about justification of such expenses. An employee is normally not expected to travel during the lockdown. Restaurants and clubs are also closed. Hence, an employee would find it difficult to substantiate the claim that he/she had actually incurred these expenses in course of employment,” said Ashok Shah, Senior Partner, NA Shah Associates LLP.

In the absence of any declaration and/or supporting documents or bills, companies would not be in a position to pay the allowances as reimbursement.

“If based on evidence, tax officer assessing the company is able to hold that such claim was nothing but salary paid to employee, then he may commence proceedings for non-deduction of TDS in the hands of the company and the tax officer assessing the employee may add such reimbursement as income of the employee,” said Shah.

“Hence, unless there is definite proof that the employee has incurred the expenses for the business, a company would be well advised not to pay such expenses as reimbursement,” he added.

So, companies may either withhold payment of such allowances as reimbursement or may pay as taxable allowance after deducting the TDS.

“It depends on how the CTC of the employee provides for payment of such reimbursements and such reimbursement policy may vary from company to company,” said Dr. Surana.

However, if such allowances are released as taxable allowances, there would be a sudden rise in taxable income of an employee. For example, if an employee takes 50 per cent of his/her CTC as reimbursement, in this case he/she would get double salary in a month during the lockdown period or one month’s extra taxable salary for the financial year.

If the lockdown remains for 2 months, he/she would get double taxable salary for 2 months in comparison to the normal period.

So, will the sudden rise in taxable salary create a problem for such employees?

“In case of significant variation, there may be a probability of tax returns being scrutinised by the income tax authorities. However, based on past selection patterns, it has been seen that the focus of the tax authorities is more on businesses as compared to salaried individuals, unless substantial transactions / variations have been noticed by them,” said Dr. Surana.

So, there may not be any compliance problem, but the tax liabilities of the employees may increase.

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