The Income-Tax Act, 1961 (‘the Act’) currently provides for an exemption to both public and private sector employees with regards Leave Travel Assistance (LTA) received from employer towards expenditure incurred on travel within India. The exemption is available upon satisfaction of prescribed conditions to the extent of amounts specified in the Income-Tax Rules, 1962.
The aforesaid exemption is provided only for travel within India with the intention to promote Indian tourism and the conditions for claiming exemption have remained unchanged for many years.
Due to travel restrictions imposed by the government on account of the ongoing pandemic, the employees could not undertake travel. And hence could not avail the benefit of exemption under LTA for the past 1-2 years. Therefore, in order to offer some relief to the salaried class, the government had announced the LTC cash voucher scheme (‘scheme’) in October 2020, which was later notified vide Finance Act, 2021. The scheme was valid only until March 31, 2021, i.e., for FY 2020-21. However, no benefit in this regard was extended in FY 2021-22.
Under the scheme, employees could claim tax-free reimbursement for any goods purchased or services availed which incurred GST of 12 percent or more by submitting the invoice to the employer. The employees were required to spend three times of the deemed LTA fare (it is assumed that LTA is forming part of their salary structure) to avail benefit under this scheme. The resurgence of COVID-19 cases and recent surge in the Omicron variant have led to continued travel restrictions even in FY 2021-22 and may continue in some shape or form in FY 2022-23 as well. Hence, there is a popular expectation that the government extends the scheme for FY 2022-23 as well.
Separately, once the situation becomes relatively normal and people start to travel again when such restrictions are lifted, the government could also consider revisiting the exemption under LTA provisions to include expenditure incurred by the employees towards accommodation (hotel, motel, homestay, guest houses, etc.) along with the currently allowed exemption for travel costs. Such extension of exemption would provide a push to the employees to undertake travel as it would give them a higher tax exemption, which will eventually play an important role for the economic recovery of the tourism and hospitality industries which have been severely impacted over the last couple of years due to the pandemic.
It may also be prudent for the government to consider including expenditure towards overseas travel as well for claiming LTA exemption specially when the foreign tour is operated/ managed by an Indian travel agent/ company. The government could, therefore, contemplate extending the exemption under LTA for such foreign travel as well.
Bringing in such amendments will be welcomed by the salaried class. And at the same time would also stimulate the economy impacted by the pandemic. The government will need to balance the direct tax revenue foregone due to this move and the overall boost to the spending in the economy which could create resultant demand as well.
(By Parizad Sirwalla, Partner and Head, Global Mobility Services-Tax, KPMG in India)