Consider this. If a company defers an employee’s salary or a vendor’s payment, say by six months, tax is applicable on such salaries or payments under current taxation laws, tax experts said, since it is a promise of income in future.
As companies defer salaries to staff and payments to suppliers and vendors due to cash flow constraints because of the Covid-19 pandemic and resultant lockdown, it is clear that deferring the expense does not mean that tax, too, can be postponed, the experts said.
They say, as per current tax regulations, companies will have to provide for any deferral under Section 192 of the Income Tax Act in their books and tax will have to be deducted on that. So, irrespective of whether the recipient receives a salary or payment, tax is applicable.
And, if the deferred salaries or payments are never paid or postponed beyond March 2021, the recipient would have to pay taxes for the current fiscal year on money never received.
The situation may be more worrisome for vendors and service providers who have not received payments.
“The problem is that if the company for some reason doesn’t pay the amount when it’s due or eventually, then employees or the service providers who didn’t get the salaries and payments will still be stuck with the tax from a cash flow perspective,” said Girish Vanvari, founder of tax advisory firm Transaction Square.
Companies are thinking of passing on the tax to employees, who would then have to pay up even when their salaries have been slashed. Facing cash flow issues, many have already told service providers and vendors that payments cycles will be extended by a few months. “For vendors and service providers whose payments have been deferred, tax has to be paid whether or not the money is received. The case would be different if such a vendor is following cash system of accounting,” said Paras Savla, partner at tax firm KPB & Associates.
Source : Financial Express