'Introduce `Equalisation Levy` as part of Income-Tax Act Rather Than as Separate Levy Under Finance Act'

“Introducing equalization levy separately under the Finance Act and not incorporating it as a part of the existing Income-tax Act would only increase cost of doing business for Indian companies, as foreign companies would insist that this being a domestic levy should not affect payments made to them, as such domestic companies would be required to gross up equalization levy while making payments, thereby adding to the cost,” highlighted The Associated Chambers of Commerce and Industry of India (ASSOCHAM) in its post-budget memorandum submitted to the Centre.

Whereas, if this levy is introduced as part of the Income-tax Act itself, it would not add to the cost of business to Indian company as it would be in nature of regular withholding, it said.

Besides, the Organisation for Economic Co-operation and Development (OECD) had explicitly communicated that countries could introduce ‘equalisation levy,’ provided they respect their existing treaty obligations.

Thus, introducing ‘equalisation levy’ as a chapter in the Finance Act, could undermine treaty eligibility and it should therefore be brought within the ambit of income-tax law.

Further, ASSOCHAM has also suggested that it should be clarified that the term ‘true and fair inventor,’ would include a company that acquires patent or right to apply for patent from its employees who have developed such invention during the course of their employment.

On the issue of retiral funds, ASSOCHAM has recommended that all stipulations relating to taxability of accumulated balance/annuity for recognised provident fund and superannuation fund as well as the financial limit of Rs 1.50 lakhs for employer’s contribution to Superannuation Fund be withdrawn.

As per a recent government clarification in respect of the accumulated balance in the recognised provident fund, the taxability of stipulated 60 per cent balance will not apply in case the same is invested in an annuity.

“This is an extremely controversial suggestion since money (lump sum) is generally utilised from the provident fund for various important purposes like construction of house, wedding and others and the salaried class cannot be forced to invest in any annuity scheme for tax saving purpose when lump sum money is required post-retirement,” highlighted ASSOCHAM post-budget memorandum.

It may be noted that it is an individual’s call for deciding on utilization of the said lumpsum amount post retirement and the Government should not interfere in that area.

Further, getting a cash salary and contribution to PF becomes tax neutral, then it would be preferable to obtain cash salary rather than paying tax in current year and getting the money after a long gestation period.

Moreover, this would result in mixing up the entire retiral benefits schemes since the Provident Fund would effectively get converted into a pension scheme.

PF for Government employees continue to get a completely tax free status by virtue of section 10(11). Consequently, it would result in providing preferential treatment with regard to taxability of PF for Government sector vis-à-vis private sector employees.

In respect of commutation of pension, the same logic would equally apply because the commuted lumpsum amount is utilized for various important purposes for the salaried class and therefore historically the 100% tax incentive was provided in the Income Tax Law.

This also will result in discrimination vis-à-vis Government Employees who continue to get the commuted annuity totally tax free. As such, it is suggested that the stipulation for taxing 60% of the commuted amount is withdrawn.

Further, the taxability of Employer’s contribution in the Superannuation Fund beyond Rs 1.50 lakhs is an extremely arbitrary measure since Superannuation benefits are only given post – retirement and therefore employees would be required to pay income tax immediately for a retirement benefit which will only be available after his superannuation.

Moreover, Superannuation benefits are of a contingent nature which are available only if various conditions are complied with like certain number of years of service, the individual remaining alive at that stage etc.

In fact, in CIT vs. L W Russel <2002-TIOL-686-SC-IT-LB>, the Supreme Court had held that no tax can be levied in respect of a contingent interest in future which is not certain.

Also, there is no monetary limit in the NPS scheme of the Government. As such it is recommended that the financial limit of Rs 1.50 lakhs be withdrawn.