Playing Santa to employees

On August 29, 2013, the long-awaited Companies Bill 2013 finally received the President’s assent to become the new company law. On September 12, 2013, the Ministry of Corporate Affairs issued a circular notifying most of the definition clauses and some sections. The full impact of the new Act is not clear yet, as many rules or circulars are awaited. The Ministry is seeking suggestions/ feedback on the draft rules.

A milestone development in the history of Indian corporate law, the new Act will replace Companies Act 1956. Some of the key changes pertaining to employees and directors are highlighted here.

No prohibition on payment of tax-free remuneration: Section 200 of the erstwhile Act prohibited payment of tax-free remuneration to any officer or employee of a company. However, there is no parallel provision in the new Act. Consequently, an Indian company will be able to pay employees tax-free remuneration.

Ordinarily, the personal tax liability on the salary income borne by the employer is a taxable perquisite in the hands of the employee under Income-tax Act 1961. Hence, the employer may need to suitably gross up the tax amount when discharging the withholding tax obligation. For example, if net of tax salary payment is Rs 100 and the tax rate is 30 per cent, the employer may need to pay a tax of Rs 43 (30 per cent of Rs 143) and not Rs 30 (30 per cent of Rs 100), as the tax has to be grossed up.

However, under the income tax law, an employer can opt to bear the tax on the ‘non-monetary’ perquisites offered to an employee.

This tax liability is exempt in the hands of the employee. Further, there is litigation over whether the tax perquisite is ‘monetary’ or ‘non-monetary’. There are a few rulings confirming that the tax perquisite is a non-monetary perquisite eligible for a single-stage gross-up.

One condition to claim the exemption is that the tax paid by the employer on ‘non-monetary’ perquisites would not be allowed as a deduction for the company. Therefore, the company should carefully evaluate the costs and benefits involved.

It is important to note that the effective date for removal of Section 200 has not been notified and, therefore, it remains in force.

Managerial remuneration: According to the erstwhile Act, ‘remuneration’ included ‘any expenditure incurred’ on four specific perquisites — rent-free accommodation; any other benefit or amenity; meeting personal obligation; and insurance on the life of, or pension, annuity or gratuity provided to any director/ manager or his spouse or child.

The new Act has defined remuneration as “any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income-tax Act, 1961”.

This would result in additional components in the calculation of managerial remuneration.

While some of the changes discussed have already been notified by the Central Government, the other sections are not operative yet. In view of these changes, companies should evaluate their compliance under the new Act.

Rama Karmakar, Senior Tax Professional, contributed to the article.

The author is Director — Tax and Regulatory Services, EY