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'Tax on perks violates Companies Act'

D John Samuel Raja

The proposed amendment in the Finance Bill, 2002, allowing employers to pay tax on behalf of employees on non-monetary perks, may prove to be a non-starter.

The proposal by Finance Minister Yashwant Sinha contradicts Section 200 of the Companies Act, which prohibits companies from making tax-free payments to employees.

"No company shall pay to any officer or employee, remuneration free of any tax or otherwise, calculated by reference to any tax payable by him," Section 200 states.

Pradeep Bhandari, a practising chartered accountant and a direct-tax expert, said the provision in the Finance Bill could not override provisions in other Acts, including the Companies Act.

"Unless there is a separate amendment in the Companies Act allowing tax-free payments, employers will be violating Section 200 of the Companies Act," he said.

Sinha, in his Budget speech, said an employer could pay tax on behalf of employees on the value of non-monetary perquisites, without making any deduction from the income of the employee. This was made possible by inserting a new clause, 10CC, in Section 10, which deals with deductions from taxable income.

However, the tax so borne by the employer will not be allowed as a deduction in view of a specific disallowance provided under Section 40 (a) of the Income-Tax Act.

While, the Finance Bill, 2002, talked of several amendments to the I-T Act, it was silent as to whether Section 200 of the Companies Act would be amended. Any move to amend the Companies Act would require Parliament's approval.

Even otherwise, the proposed change in the I-T Act is unpopular in the industry as the latter will end up being doubly taxed.

For instance, if an employer decides to pay tax on non-monetary perquisites valued at Rs 1,000 per month and if the employee is in the 30-per cent tax bracket, the employer will have to pay a tax of Rs 300 on the value of perquisites.

Since, the payment of tax is not an allowable expenditure, the employer will incur an extra tax burden of Rs 105 due to corporate tax of 35 per cent. Thus, the total cost to the employer works out to Rs 1,405 per month.

To circumvent this, the employer can choose to pay an additional sum of Rs 300 to the employee. This will enable the employer to claim it as an allowable deduction and save Rs 105.

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