Budget 2018: How Arun Jaitley smartly ended free lunch for high income drawers

It is axiomatic that in order to be taxable as salary, the payment or benefit should have been made by the employer to an employee. Such axioms are often latched onto with alacrity by those harboring ulterior motives i.e. tax evasion. Courts’ and tribunals’ hands were tied in such situations. The tax administration couldn’t do anything except wring its hands helplessly in the face of courts’ reluctance to look into the spirit of the law rather than its letter. But the jurist in Finance Minister Arun Jaitley has come to the rescue of the tax administration.

Jaitley has amended both section 28 and section 56 to make it clear that whether person is a company promoter (not drawing salary and hence covered by section 28 dealing with business income) or a salary-drawing honcho liable to pay tax under the head income from salary, any compensation or other payment made by a third party would be taxable. Jaitley knew he was skating on a thin ice. Axioms and courts cannot be ignored or disrespected after all. So he has found a via media for employees.

File image of Finance Minister Arun Jaitley. PIB.

File image of Finance Minister Arun Jaitley. PIB.

Suppose a foreign parent of an Indian subsidiary pays compensation or any other payment to the honcho of its Indian subsidiary, technically it is not taxable because the honcho’s employer is the Indian subsidiary and not the foreign parent company. Ditto for compensation or payments made by the acquiring company to the honcho of the acquired company.

Jaitley has very deftly got around this technicality---tax such third party payments to employees as income from other sources under section 56 and do not tax them as income from salary under section 17. To the taxman what matters is tax. So what if such payments by third parties are taxed as income from other sources and not as salary. In Hindi colloquy this attitude is philosophically called aam khane se matlab hai which crudely translated means one must concern himself with the net result and not with the technicalities.

So if a clever honcho of a to-be acquired company, who is all set to be ousted by it, arranges with it for a hefty severance compensation often running into crores of rupees, such compensation would hereafter i.e. from the AY 2019-20 be taxable as income from other sources. And the same will be taxable as business income for a promoter who prefers not to draw salary in the capacity of a whole time director.

Jaitley has chosen not to rock the boat which would have been the case had he put a shovel into such income retrospectively. He has wisely chosen to make these amendments prospective. Retrospective amendments are generally frowned upon by courts as draconian and putting a financial burden on the assessee he had not bargained for. Some however would say a retrospective amendment would have been in order to counter the devious stratagem of the honchos to avoid tax.

Jaitley has chosen a non-confrontationist approach with the courts and tribunals. The amendment is couched in broad terms so much so that it can reach out to payments not only by foreign parent companies and acquirers. Suppose a promoter has shell or dubious companies to park his illicit moneys and pays a substantial amount to a honcho from these companies. As it is it is not taxable. But it would be taxable hereafter.

Adverse tribunal/court rulings are often overcome with amendments. Jaitley must be commended for making amendments tactfully and intelligently. Had he brought the honcho compensation from third parties under income from salary, it could have been challenged successfully as brazen. By roping it under section 56 i.e. income from other sources, Jaitley has preempted such an offensive because income from other sources is designed to rope in income taxable but not fitting under other heads of income.

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(The writer tweets @smurlidharan)

Updated Date: Feb 05, 2018 13:29 PM

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