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A S Amarnath B.com, FCA, LLB

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Labour code

Is your establishment UP for upcoming labour codes?

The new labour code has been enacted in the pursuit of simplifying, consolidating and rationalizing the central and state labour laws. One of the objectives is to improve India’s position in the global ‘ease of doing business index. All the four codes have received presidential assent and expected to be implemented shortly. The state governments are in the process of finalizing their rules with respect to these codes. The existing 28 labour acts have been amended and consolidated into the following four codes:

  • The Code on Wages
  • The Code on Social Security
  • The Occupational Safety, Health and Working Conditions Code
  • The Industrial Relations Code

Definition of Wages

All the codes have adopted a uniform definition of wages. The definition of wages covers all salary components expressed in terms of money or capable of being so expressed. However, the codes provide some specific exclusion to arrive at the wages.

Exclusions

  • Bonus payable under any law which does not form part of the terms of the employment contract
  • House Rent Allowance
  • Conveyance allowance
  • Leave travel concession
  • Overtime allowance
  • Commission
  • House accommodation provided under government order
  • Employer contribution to provident fund or pension fund
  • Amount paid to defray special expenses
  • Gratuity
  • Retrenchment compensation
  • Award or settlement

The above exclusions (except gratuity and retrenchment compensation) are capped at 50% of total remuneration. Remuneration in kind to the extent it does not exceed 15% of total wages need to be included in wages.

Key Aspects

Key aspects

Budget 2021 – Impact on Individuals

Budget 2021

The Finance Minister started her Direct tax proposals remembering the tax-friendly measures introduced by her prior to few months of the pandemic. She also mentioned that the number of returns filed has seen a dramatic increase to 6.48 cr from 3.31 cr in 2014. So, in a span of 6 years, the number of tax returns filed has almost doubled. Thanks to the demonetization and implementation of GST, amongst other things. 

Coming to the current budget 2021, the following are some of the amendments impacting individuals.

Interest on PF contributions

Currently, the withdrawal of accumulated balance (i.e., both principal and interest) in the provident fund is generally exempt provided the contribution has been made for a continuous period of 5 years. It is proposed to tax the interest income accrued during the year which is attributable to the contributions made by the taxpayer (i.e., employee contribution) in excess of Rs.2,50,000. This may have huge impact on the voluntary contributions made by the employees. Such employees may need to rethink contributions beyond Rs.2,50,000 and could explore alternative investments that may provide for higher returns than the provident fund.

Impact on proceeds from ULIPs having huge premiums

Hitherto, there was no tax on the proceeds of ULIP if the premium payable did not exceed 10% of the actual sum assured. Budget 2021 proposes to tax the proceeds from ULIPs issued on or after 01 Feb 2021 if the premium payable exceeds Rs.2,50,000 even though such premium is less than 10% of the actual sum assured. However, this is not applicable if the sum is received on the death of a person. Since the intention of exemption currently provided is to benefit small and genuine cases of life insurance, it is proposed to tax high net worth individuals who were investing in ULIPs with an objective of investment and not from risk coverage.

Indian residents having income from foreign retirement funds

Individuals who are residents and ordinarily residents’ in India and having income from foreign retirement funds were facing huge hardship due to the mismatch in the year of taxability of income from such funds. Since these individuals are taxable on their global income, the income on such retirement funds was taxable in India in the year of accrual. However, in most cases, the withdrawals may be taxed in the other country on a receipt basis. So, there is an absolute mismatch in recognising the income for taxation purposes and many times such individuals may end up paying taxes in both countries. To remove the genuine hardship, the Budget 2021 proposes to prescribe the manner in which such income should be taxed from the specified retirement funds. Considering the difficulties faced by such taxpayers, this amendment is a welcome move and expected to avoid the double taxation impact on such individuals. Hope the widely held accounts like US IRAs and 401Ks will get included in the list of specified funds.

Advance tax on dividend income

An individual needs to pay advance tax in four installments. For this purpose, the income needs to be estimated and if there is excess or shortfall, the same can be adjusted in the subsequent installments. Interest will be applicable for a shortfall of taxes if any. However, for certain incomes like capital gains etc. taxpayers can pay the advance tax in the installment coming up after the capital gain transaction without paying any interest. Since the income of such nature cannot be estimated, this relaxation has been provided. Now dividends also are coming under this list i.e., advance tax on dividend income can be paid only subsequent to the receipt of such dividend. This will ease the taxpayer from the burden of estimating the dividend income for advance tax purposes.

Sale of the residential unit by builders or developers

Currently, if the sale price of a residential property is lower than the stamp duty value or circle rate, the stamp duty value or circle rate is considered as sale price and accordingly, the profits are determined for tax purposes in the hands of such builder/developer. Parallelly, the same amount is taxed in the hands of the buyer of such property under the head ‘income from other sources. However, this is not applicable in cases where the difference between the actual sale price and stamp duty value does not exceed 10% i.e., for the stamp duty the value can be up to 110% of the sale price of the property. The budget 2021 proposes to increase this 10% to 20% for both the seller and buyer if the following conditions are met.

  • The sale of the residential unit takes place between 12th Nov 2020 to 30th June 2021
  • The sale is that of a new residential house
  • The sale consideration does not exceed rupees two crores

This is introduced to boost the demand in the real estate sector and to enable the developers to liquidate their inventory.

Extension of time limit for sanction of loans in case of affordable housing

As per the existing provisions, an additional deduction of Rs.1,50,000 is available towards interest on a loan taken for a residential house property if the loan has been sanctioned between 01 April 2019 to 31 Mar 2021. It is proposed to extend this period till 31 Mar 2022. The additional conditions like the stamp duty value of the property cannot exceed rupees 45 lakhs and the taxpayer does not own any residential house property on the date of sanction of loan, need to be satisfied.

Exemption from tax return filing for a certain category of senior citizens

It is proposed to exempt senior citizens who are of the age of 75 years or more from tax return filing provided the below conditions are met: 

  • Such senior citizens have an only pension and interest income
  • Such income should be from the specified banks.
  • Interest income should be from the same bank in which they are receiving  pension
  • Such banks have deducted adequate taxes on the above income

Though the intent of the above proposal is laudable, one needs to see to what extent this will ease the compliance burden of senior citizens since the conditions may rarely be met by them.

Procedural changes

The budget 2021 also proposes the following procedural changes:

  • The time limit for filing belated/revised return has been reduced by 3 months. For example, the belated or revised return for the FY 2021-22 can be filed upto 31 Dec 2022
  • The limit of turnover for tax audit purposes is proposed to increase to 10 crores where 95% of receipts and payments are done through digital mode
  • Going forward pre-filled returns cover capital gains, dividends, etc.
  • Dispute resolution committee to be set up to reduce litigations for small and medium taxpayers.

This budget appears to be simple and has minimal impact on individual taxation. There were series of amendments made to income tax laws during/post-pandemic and this could be one of the reasons for such a simple budget.

Covid – 19 pandemic has resulted in huge disruption of transport and hospitality sector. Due to this, employees are not able to avail Leave Travel Allowance (LTA) benefit provided by employers. LTA benefit entitles an employee to avail tax exemption in respect of travel costs incurred by an employee for himself and his family to any destination within India. The exemption is available in respect of two travels made in a prescribed block of four calendar years (currently 2018-21). In order to incentivise employees and also boost the consumption, the government has come up with LTA cash voucher benefit.

As per the same, an employee is entitled to a cash allowance of Rs.36,000 per person. So, in case of a married person having two kids, the maximum amount of Leave Travel Allowance cash benefit would be Rs.1,44,000 (36000*4) i.e., for himself, spouse and two kids. Since, this is the maximum amount, if the employee is entitled to only Rs.1,20,000 as LTA in his salary package, the benefit would be restricted to such amount. Such LTA benefit would be exempt from taxation if the following conditions are fulfilled –

  • Leave Travel Allowance (LTA) should be forming part of the salary structure.
  • Employee should not have availed LTA exemption with respect to both the travels made during the current block period.
  • Employee spends 3 times the value of LTA cash allowance on goods and services which are subject to GST at the rate of 12% or more
  • The above spending should be during the period from 12 Oct 20 to 31 Mar 21
  • The payment for such purchases must happen in digital mode. The purchases made by cash payment will not be eligible for this benefit.
  • The employee must obtain an invoice indicating the GST number and the amount of GST paid.
  • Invoice should be in the name of the employee.

Points to note

  • Employees opting for simplified tax regime are not eligible to avail LTA cash benefit.
  • It is optional for the employee to choose between cash benefit and the normal Leave Travel Allowance.
  • Though 31st March 2021 has been specified as the last date for spending, tax proof submissions in most of the corporates may happen in Jan/Feb. So, employees would need to plan their spending accordingly.
  • If an employee spends less than 3 times of the LTA cash allowance, the income tax exemption would be proportionately reduced.

Example

Here is an example of tax savings in case of an employee who is married and having two kids.

Particulars Amount (INR)
(A) Maximum cash benefit (36,000*4) 1,44,000
(B) LTA as per his salary package 1,20,000
(C)Cash benefit entitlement – Lower of (A) and (B) 1,20,000
(D) Amount to be spent to avail full exemption – (C)*3 3,60,000
(E) Tax savings assuming 30% tax slab with no surcharge 37,440
Tax savings at maximum spend

Suppose if the employee spends only Rs.1,80,000 his benefit would be proportionately reduced as shown below.

Particulars Amount (INR)
(F) Amount spent 1,80,000
(G) Exemption – (C)*1,80,000/3,60,000 60,000
(H) Tax savings 18,720
Tax savings at less than maximum spend

Conclusion

If you observe the above example closely, the tax saving is coming to just above 10% of the total amount spent. That means, in order to save 10% of taxes, one need to spend 3 times the benefit provided which may not be practical in many cases, especially during these difficult times. Hence, employees need to be cautious before making this choice and exercise their prudential judgement.

Another benefit provided under the normal Leave Travel Allowance(LTA) rules is that, if an employee is unable to claim the exemption with respect to one or more travels in a block of four years, he may carry forward one such journey to the next block. However, such carry forward LTA exemption needs to be utilised in the first year of the subsequent block.  For example, if an employee has availed LTA exemption only once in the current block of 2018-2021, he can avail exemption with respect to the travel undertaken in the first year of the subsequent block i.e., 2022. He can further claim exemption in respect of two more journeys between the years 2023 and 2025. Employees whoever is eligible could explore the option of carrying over the Leave Travel Allowance(LTA) benefit instead of spending thrice the amount of cash benefit.

Are you a Foreign National worked in India post 2008? You may have large sums lying in your India Provident Fund Account.

Background on Provident Fund regulations

Employees’ Provident Fund Act is one of the important labour legislations in India which provides for retiral benefit in case of non-government employees. The applicability of this Act is mandatory in case of an entity having 20 or more employees at any time during the year. Both employer and employee need to contribute 12% of salary each to this fund. A portion of the employee contribution may go to pension fund depending on the date of joining, wage level and age of the employee. Salary for this purpose excludes House Rent Allowance, Overtime Allowance, Bonus, Commission and similar allowances, perquisites and gifts by employer. In case of an employee whose Provident Fund (PF) wages exceed INR 15,000 has option to restrict the contribution to 12% of INR 15,000 or can opt out of the contributions subject to conditions. Employer would make a matching contribution.

Applicability to Foreign Nationals

Indian Provident Fund laws were amended to make the contributions mandatory in case of foreign nationals effective 01 Nov 2008 with a very few exceptions. Accordingly, an International Worker (IW) working for a covered establishment in India would need to make compulsory contribution to this fund irrespective of their wage level. This means that even if the salary exceeds INR 15,000 it is mandatory for him to contribute to this fund. An IW is defined as a foreign national working for an establishment in India to which the Provident Fund (PF) Act applies.

So, in case of foreign nationals 24% of salary (12% employer and 12% employee) would be contributed to the fund without any cap which could be a sizeable amount. As an illustration, if the monthly salary is INR 500,000 approximately INR 120,000 per month will be contributed to this fund. Further, the fund would fetch a very good interest (8.5% for FY 2019-20) as well. However, there could be a slight variation in the interest rates year on year.

Exceptions

If any of the following applies to an IW, it is not mandatory for him to contribute to the Provident Fund in India.

  • IWs working for an establishment to which the PF Act does not apply, basically an entity having less than 20 employees
  • IWs from social security agreement (SSA) countries contributing to their home country social security
  • Singapore Nationals / Permanent Residents eligible for exemption under the Comprehensive Economic Agreement

Social Security Agreements are bilateral agreements entered by Indian government to avoid double social security contributions. Currently India has effective SSAs with 18 countries and the list of such countries and effective dates are provided in the annexure below . If a foreign national has worked in India prior to the effective date of the SSA, there could have been contributions to the PF fund in India.  As you observe, India still does not have a social security agreement with US and UK.

Withdrawals of Provident Fund

So, what happens to this fund? Can a foreign national withdraw the amount lying in the PF account?    

Definitely ‘Yes’. However, there are certain conditions attached to this. Let us understand what these conditions are.

  • Foreign national from an SSA country can withdraw the amount lying in his Provident Fund account at or after repatriation from India. May also be eligible for monthly pension after retirement as per the SSA. The amount could be credited to the foreign bank account if there is no bank account in India.
  • Foreign nationals from non-SSA countries can withdraw the PF accumulations on attaining the age of 58 years or at the time of repatriation whichever is later. May be eligible for pension if he has contributed for a period of 10 years. Amount will be credited to the Indian bank account only.

Further, if the contributory period is less than 5 years, the withdrawals may be taxable in India as per Indian tax laws subject to relief under Double Taxation Avoidance Agreement. Further, the interest accumulations post repatriation may be taxable even if the contributory period is more than 5 years. However, the treaty relief could be explored here as well.

Annexure – Social Security Agreements with India

CountryEffective date
Belgium1-Sep-09
Germany1-Oct-09
Switzerland29-Jan-11
Denmark1-May-11
Luxembourg1-Jun-11
France1-Jul-11
Korea1-Nov-11
Netherlands1-Dec-11
Hungary1-Apr-13
Finland1-Aug-14
Norway1-Jan-15
Sweden1-Aug-14
Canada1-Aug-15
Japan1-Oct-16
Czech Republic1-Sep-14
Austria1-Jul-15
Portugal8-May-17
Australia1-Jan-16
Table showing list of countries with SSA and effective dates

The write-up is for general understanding. We suggest the readers to discuss with their consultants before deciding on their eligibility for withdrawal and related Tax Implications.

Taxability of Dividends in case of NRIs

Further to the article on NRI residential status, there were a couple of queries raised by the readers on the taxability of dividends.  Here are some of those queries and answers for the benefit of the readers.

  • Are dividends received by NRIs from Indian shares/mutual funds taxable in India?

Till 31 Mar 2020, dividend income from an Indian source was completely exempt in the hands of NRIs. However, from 01 April 2020, such dividends would be taxable in India and NRIs would need to pay tax at applicable rates. If there is a Double Taxation Avoidance Agreement (DTAA/tax treaty) between India and the country of residence, a beneficial rate as per the treaty could be applied. Taking the UK as an example, most dividends are taxed at 10% as per India-UK DTAA. This is subject to the availability of TRC from the country of residence.

  • What is TRC? Is it mandatory to avail treaty relief?

TRC stands for Tax Residency Certificate. This will be issued by the tax authorities of the respective country certifying that the individual NRI is a resident of such country. Most countries have a specific form prescribed for this purpose and an NRI who wishes to avail the treaty benefit would need to apply for the same to the respective country’s tax authorities. As per the Indian tax laws, TRC is a mandatory document required to avail any treaty relief by a non-resident.

  • Is withholding tax/Tax Deduction at Source (TDS) applicable in case of dividends paid to NRIs?

Yes, the dividends paid to NRIs would generally be subject to 20% withholding tax in India. However, the actual tax on dividends may vary depending on the total income of an individual and applicable slab rates. So, the differential taxes would get adjusted at the time of filing the tax return.

  • Can an NRI avail the beneficial rate as per the treaty at the time of tax withholding itself?

Yes. An NRI can avail of the beneficial rate on dividends at the time of tax withholding. In order to avail this, the individual needs to submit the TRC and other prescribed documents to the company. Some companies are contacting individual shareholders to confirm their residential status and other documentation to avail of the treaty benefit. Please ensure that this information is submitted to the companies so that the beneficial rate is availed at the time of withholding itself. In this way, refunds on the tax return could be avoided as well.

  • Can an NRI avail Foreign Tax Credit in his home country on taxes paid on dividends in India?

Generally, yes. However, this may also depend on any specific conditions/documentation requirement specified in the tax treaty or domestic tax laws of such resident country. It is advisable to go through the same and ensure that those requirements are met before availing the credit.

The write-up is for general understanding. We suggest the readers to discuss with their CAs before deciding on tax implications.

Recent Changes in Residential Status

Mr. Ram is an Indian citizen (NRI) living abroad for several years now. He has his extended family, immovable properties and other investments in India. He frequently visits India to meet his family and friends and to manage his investments. During his recent conversation with an Indian friend, he came to know that there have been sweeping changes to the Indian tax laws with respect to residential status of an individual which may result in expanding his tax base in India and he may qualify to be a ‘stateless’ person. Ram is curious to know more about these changes.

So what are these changes? Does it really have far reaching impact on NRIs like Ram? Who is a state less person? Let us understand these in detail.

Hitherto (till 31 March 2020), an Indian citizen or a person of Indian origin living outside India and coming on a visit to India could have stayed in India for a period less than 182 days without triggering residency in India. However, the new rule (applicable from 01 Apr 2020) reduces this threshold to 120 days. Further, the new rule has inserted an income threshold of INR 1.5 million from sources within India in order to trigger residency. So, both the conditions i.e., no. of days and the income level need to be satisfied in order to trigger a residency. In case of Ram, he would be considered as Resident but Not Ordinarily Resident in India provided his stay in India during the relevant tax year exceeds 119 days (but less than 182 days) and his total income from Indian sources exceeds INR 1.5 million.

Stateless person or Deemed resident

A stateless person in the context of taxation means a person who is not liable to tax on his income in any country during the year. It may be possible for an individual to position his affairs in such a manner that he is not liable to tax in any country. In order to curb these kinds of arrangements, the new rules introduced the concept of ‘deemed residential status’.  As per this, an Indian citizen having total income exceeding INR 1.5 million or 15 lacs from sources within India during the relevant year, will be deemed to be a resident of India (RNOR) if he is not liable to pay tax in any country outside India.

So in case of Ram, since he is a resident of foreign country and is a citizen of India, he may be considered as RNOR for India tax purposes provided his total income exceeds INR 1.5 million from sources within India and he is not liable to tax in his country of residence.

For the purpose of above rules, the income from sources within in India includes income arising outside India from a business controlled in India or profession set up in India.

So you are an RNOR. Is your global income taxed, then? uh!

So what happens if an individual qualifies as RNOR? Will his global income be taxed in India?

Definitely NO. In case of an RNOR, in addition to the Income derived from Indian sources, the individual would be taxed on income arising outside India from a business controlled /profession set up in India.

Further, in case an RNOR who is liable to tax on his income arising outside India from a business controlled /profession set up in India, may result in double taxation of income both in India and in his resident country. So in order to mitigate the double taxation implications, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India has entered into with other countries in order to mitigate the possibility of paying taxes in two countries.

The write-up is for general understanding. We suggest the readers to discuss with their CAs before deciding on their residential status and related tax-implications.