Law Street in The Economic Times (April)

Dear Readers,
India Inc., like companies across the world is on a cost-cutting spree. Be, it through simple measures like reinforcing the need to switch off the lights at the workplace, greater reliance on video conferencing, travelling by economy class, if at all required (even for the top level of management), or even more complex measures such as new mechanisms of salary structuring with a higher margin of variable pay, or salary cuts etc, not to mention hiving off of non-core business or even doling out pink slips.

India Inc is trying it all out. This brings me to values. When times are tough, do companies just pay lip service to values? True, you will find values splashed across a corporate office, most probably a huge frame in the chairperson's corner room, or in the board room, or it could even hit you through large visuals in the vistors' lobby. Yet, do values get diluted when the going gets rough and the eye is only on the bottomline?

CK Prahalad in The Economic Times, Corporate Dossier, dated April 10, had this to say: "The values have to be continuously reinforced because there is a lot of pressure to cut corners. So it’s important to emphasise that how we do things is as critical as what we do. Core means many different things to different people. It is the same for values. We have to be careful about what can change and what we cannot. For example, can the business models change? Of course, they must. Can the product portfolios change? Of course, they should. But should we change issues of integrity, respect for individuals, the need for globalisation or transparency? These we should not change. They need to be reinforced. So a crisis is not a licence to change core values."

How are values connected to tax land? Well, some companies walk that extra mile to ensure that not only are they honest tax payers, but are highly responsible tax deductors as well. Arguably the administrative costs for such companies is comparatively higher. Should'nt a more simple mechanism exist?

I have been so impressed with one particular company - MindTree Limited. You can find its integrity book: All about integrity on its website

ET's editorial policies do not permit me to name companies in my column, but now you know which company I am referring to.

To read the article online, click here. Else, as always it is pasted below.

Happy reading.

PS: Some people contacted me stating that the link to MindTree's integrity policy was not functional. I have now provided the correct url. Let me all add that I am in no way associated with MindTree Limited - neither as an employee nor as a shareholder.

Best regards,
Lubna

Honesty is the best policy

 Administrative tax obligation costs for employers must be low
 Alternative mechanisms should be introduced
 Practical tax regulations are required

Zenobia Aunty has been under the weather these days and is prone to biting people’s head off. So, it was with much trepidation, that this columnist tip-toed into the guest bedroom to remind Aunty of the forthcoming deadline.

Aunty violently waved Corporate Dossier, which contained the tête-à-tête with CKP, in her niece’s face. CKP had emphasised that in these tough times, the message of a company’s core values needs to be reinforced and never diluted. Aunty croaked: Why should honest employers be penalised with higher tax administrative costs?

Recently, the Supreme Court (SC) had to determine whether a company is under a statutory obligation to collect evidence that its employees have actually utilised their LTA claims. In its brief order, the apex court held that, there is no CBDT circular requiring the employer under section 192 to collect and “examine” the supporting evidence to the LTA declarations made by the employees.

In respect of each financial year, the CBDT issues a circular relating to: Income tax deduction from salaries under section 192 of the I-T Act. The circular pertaining to the recently concluded financial year 2008-09, requires an employer to collect and examine the supporting evidence to the declarations submitted by the employees only in case of HRA claims, made under section 10(13A) and Rent claims made under section 80GG.

This columnist decided to ask other experts for their views on this decision. Experts say: “The employer is required to withhold tax from the estimated salary of its employees. It has to be a bona-fide estimation made without intent to avoid withholding of tax. All that the SC decision does is to state that as long as the bona-fides of the employer have been established, the tax authorities cannot charge the employer for short withholding of tax merely because the requisite supporting documents evidencing incurrence of actual LTA expenses were not collected or examined, as actual examination in case of LTA, is not obligated by law.”

However, employers need to continue to ensure in case of all tax exemption/deduction claims of employees that they have the requisite material to convince the tax authorities that the estimation of salary income of the employee on the basis of which tax was withheld was honest and fair. The employer cannot turn a blind eye to wrong-doings.

New joinees at a Bangalore based IT Company are explained that the tax exemption/deduction claims made by them have to be genuine. A hand book is given to them which makes it clear that the Company will not look the other way and settle payments, because hey, it is the government which is losing and not the employer. This columnist is sure that there are a handful of others like this company which walk an extra mile to ensure that they do the right thing and the government does not lose its tax dues.

But, what is the price of this honesty? Some employers may just pay lip service to their obligation of fairly estimating and deducting tax, they may resort to convenient means of overlooking some dodgy claims – thereby keeping their administrative costs low and being perceived as a employee friendly organisation (honesty is not always palatable).

Suddenly this columnist understood her Aunty rhetorical question. True, the CBDT in the wake of this SC decision could just add to the administrative burden of employers by asking them to collect and examine each and every tiny scrap of paper that supports a tax claim.

Instead Zenobia Aunty suggests that standard deduction should be brought back and certain insignificant sops should be removed. Take for instance, the Rs. 15,000 annual deduction for medical expenses, or the Rs. 800 per month transport allowance. The standard deduction should be so fixed that it takes care of the loss of the abolition of these claims. Or better still, even other tax sops such as HRA etc could be abolished and the resulting higher tax incidence could be offset by a lower tax rate. This will mean low administrative costs to the employer, no loss of revenue for the government and no frenzy for the employees in putting things together for submission.

In another case, pertaining to several companies, the issues relating to tax withholding on salary of expat employees were clubbed together for hearing. Here, the SC has confirmed that salary even if paid outside India will be taxable in India if it relates to services rendered in India. The Indian employer would be obliged to deduct tax at source, on the entire remuneration that relates to services performed in India, even if part of such remuneration was paid to the expat’s bank account in his/her home country.

True, India needs its slice of the tax pie. Withholding tax at source is the best mechanism for mitigation tax avoidance. However, ushering in practical tax laws will make life easier for the diligent, dutiful Indian companies.

This article featured in the Tax Carnival. For other equally interesting articles that featured there, click here.