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Golden handshake could turn silver

S. Murlidharan on why it would benefit employees if the law allowed payment of VRS monies beyond this fisc.

VOLUNTARY Retirement Scheme (VRS) is now on everyone's lips. Several profitable banks are already salivating at the prospect of much less tax liability for the financial year 2000-2001, thanks to the VRS compensation payable bringing down their taxable i ncome substantially. Accountants swear by the matching concept -- an expenditure or part thereof must be charged as expense of the year in which its fruits are enjoyed by the business.

The Finance Minister would do well in the ensuing Budget to insert a provision in the Income-tax (I-T) Act to make it explicit that VRS compensation shall be deductible over a period of, say, five financial years. This would not only be in keeping with t he reality but would also serve to forestall the distinct possibility of prolonged litigation in this regard, though it would spoil the party of the profitable banks whose sights are trained on the current year. Staggering the deduction over, say, five y ears may not be all that palatable to them given the `here and now' advantage conferred by the time value theory.

The response to the VRS schemes of various banks is reported to be overwhelming. Banks are at their wits' end. They want to separate the men from the boys and give VRS only to the boys. They may succeed in persuading the reluctant men to stay on with bla ndishments, including quicker promotions, now that the deadwood is gone. The whole exercise may be completed by March 31, 2001, entitling the bank to book the VRS compensation payable as the expense of the year 2000-2001 though, as the law stands, the ta x authorities may heckle them at the time of assessment.

But unless the VRS compensation is actually paid to the affected employees on or before March 31, 2001, they would not be able to claim tax exemption which is available under Section 10(10C). This is because the exemption is available under that section only if the amount has been received during the relevant financial year. Their position would be unenviable indeed. The compensation amount would be treated as their income for the year 2000-2001 because salary, which VRS is, is taxable on due or receipt basis, whichever is earlier. Their predicament would be that they would not be able to claim the exemption under Section 10(10C) unless they had received the VRS compensation on or before March 31, 2001.

The employer faces no such problem if he follows the mercantile system of accounting which banks, among others, do. Banks will be able to claim the compensation (unless at the time of assessment it falls by the wayside on grounds of being capital expendi ture in nature) even if payment has not been actually made by March 31, 2001, or, for that matter, even by the due date for filing their income-tax return.

But they would do well to expedite the whole exercise so as to actually pay the VRS compensation before the current financial year is over in order to take care of their ex-employees' interest as well. If they fail to do so, Parliament may have to come t o the rescue of such employees with appropriate retrospective amendment. The CBDT cannot do this because the Supreme Court has, in Kerala Financial Corporation vs CBDT (1994 210 ITR 136), exploded the popular myth that beneficial circulars of the CBDT ca n even travel beyond the express letter of the law.

Needless to say, the VRS compensation sanctioned in 2000-2001 and received in 2001-2002 cannot qualify for exemption in the latter year. This time around, income has been received all right but it had accrued in the earlier year. The short point is, empl oyees for whom tax exemption up to Rs 5 lakh under Section 10(10C) is a major attraction for availing themselves of the VRS offer, should not be robbed of the exemption.

While on the subject of VRS, it would be worth examining whether exemption would be on if the compensation is received in instalments spanning different financial years. Section 10(10C) makes it categorical that the exemption is a once-in-a-lifetime bene fit, that is, having enjoyed the exemption once, it cannot be claimed again in a subsequent assessment year. For this reason alone, the employer should pay the entire compensation in one shot in the same financial year in which he sanctions it. If, for e xample, the VRS compensation is fixed at Rs 5 lakh, of which, Rs 2 lakh is payable by March 31, 2001, another Rs 2 lakh during 2001-2002 and the remaining Rs 1 lakh during 2002-2003, the employee will get exemption only on Rs 2 lakh in 2000-2001 with the remaining Rs 3 lakh being included in his taxable salary income of that year.

One may say that this regime is too rigid for employers, as it indirectly pressures them into golden handshake arrangements involving one-shot payment. The law perhaps could be amended to allow payments in instalments. Two things, however, should be ensu red in that event. One, deduction to the employer towards VRS compensation should be allowed only on payment basis, that is, in the above example, Rs 2 lakh each as expenditures of 2000-2001 and 2001-2002 and Rs 1 lakh as expenditure of 2002-2003, assumi ng the employer indeed keeps his commitment.

The employee, too, may be allowed to enjoy the exemption spanning three financial years, making it abundantly clear that the exemption once availed of in respect of VRS from one employer is not on in respect of VRS from another employer.