Private sector employees should focus on EPF, PPF, NPS for retirement, says Preeti Sharma of BDO India

Even though only a small percentage of returns are selected for further scrutiny, the government has faced challenges in reducing tax disputes and litigation, says Preeti Sharma, Partner, Tax & Regulatory Services, BDO India. 

In an interview with MintGenie, Sharma said that the Government should chalk down a clear transition plan to move to the new tax regime with certain modifications that allow deductions on account of select investments.

Edited Excerpts: 

The new tax regime gives favourable results to certain categories of taxpayers but is still not opted by many. What are the reasons? What changes can be brought to make it more preferred? 

Individuals opting for the new tax regime cannot claim several exemptions and deductions, such as House Rent Allowance, Leave Travel Concession, Savings under 80C such as Employee Provident Fund (EPF)/ Public Provident Fund (PPF)/ Equity Linked Savings Scheme (ELSS), medical insurance premiums under 80D, National Pension Scheme (NPS) under 80CCD and many more. 

Given that the legacy tax system was developed to encourage investment planning to save taxes, many individual taxpayers are tuned to make those annual investments that are now not eligible for a tax break in the new tax regime. 

With the private sector employees in India not being eligible to receive any pension post-retirement, EPF, PPF, NPS, and ELSS are in high demand among individuals. These investments serve a dual purpose, one being the corpus formation for retirement, and the other is the eligibility to claim a deduction from taxes against these payments. 

With these deductions being unavailable under the new tax regime, it has attracted less takers. The Government should chalk down a clear transition plan to move to the new tax regime with certain modifications that allow deductions on account of select investments. This will help in building a pensionable society. 

Which tax-efficient salary components may form part of an employee compensation structure?  

There are limited tax planning opportunities available to the salaried class. The new tax regime provides for preferential tax rates, but it also limits the deductions that can be claimed by an Individual taxpayer. However, we have listed down a few salary components that may continue its tax advantage in the new tax regime too:

• Employer’s contribution to National Pension Scheme: A deduction from taxable income can be claimed for the amount contributed by the employer up to 10% of basic salary + dearness allowance for the financial year
• Running and maintenance of employer: Depending upon the type of car and its usage, there are certain preferential provisions that the employee can benefit from 
• Telephone reimbursement: Expenditure incurred by the employer on behalf of the employee on telephone (including mobile phone) is not taxable in the hands of the employee. 

What are the challenges faced by Individuals while filing their tax returns and dealing with the Revenue authorities to complete assessment procedures? 

The Income Tax portal and tax return filing process are fully automated, and the return forms are pre-filled with some of your information that is available with the Revenue Authorities. While completing this process, you may have to take various decisions to ensure that the process is completed in an accurate and error-free manner. Ensuring this may create a challenge for non-tax professionals. A few instances are:

• Identification of the right form to be used for filing your return which may depend on your residential status and sources of income
• Identification and quantification of income, related expenses, and various tax breaks that you may be eligible to report in your tax return 
• Choosing the right tax regime applicable to you 
• Reporting your assets and liabilities in India and abroad 

Post filing this, a few tax returns are picked up by the revenue authorities for further scrutiny. Even though only a small percentage of returns are selected for further scrutiny, the government has faced challenges in reducing tax disputes and litigation. A significant number of cases are pending in various forums. The introduction of faceless assessments and appeal schemes was to avoid personal bias and reduce corruption in the process. Until this is achieved, many taxpayers will face problems while trying to explain this to the tax officer. A combination of faceless assessments with an option of personally connecting with the revenue authorities will help in solving this challenge. 

What are the expected labour law-related changes that may have an impact on the Individual’s compensation in hand? 

With multiple polls suggesting a third term for the current government, multiple policy level changes are expected. 

One of them is the implementation of labour codes which are already approved by both houses of Parliament, awaiting announcement on the date of enforcement. 

One major change in the labour codes is around the definition of wages. Multiple employee benefits are currently calculated with a reference to multiple definitions of wages. These definitions are updated as a single definition under the labour codes. Minimum wages, provident fund, gratuity, leave encashment, overtime, ESI, etc. may need to be calculated considering the new definition, which may impact the employees’ in-hand compensation along with bringing incremental costs to the employers. 

Name the top four to five things that a foreign national working in India should be mindful of on the regulatory and compliance front. 

Broad issues that a foreign national coming to work in India should consider are as follows:

• Immigration: The expatriate should travel on the correct visa category (business visa/employment visa/ student visa - depending upon the purpose of visit) and should get himself/ herself registered with the Foreign Regional Registration Office within the prescribed timelines.
• Taxability of the employee: The salary received by an employee for rendering services in India would be liable to tax in India as employment income is irrespective of its place of receipt. 
• Social security: Unless an individual who is a foreign passport holder is covered under a Social Security Agreement signed between India and their home country and has received a certificate of coverage, they are mandatorily required to contribute under the EPF Act on their salary. There is a recent High Court ruling on the validity of this provision, but the matter would receive finality at the Supreme Court level. 
• Permanent establishment and transfer pricing: The presence of employees of a foreign entity in India may create a Permanent Establishment (PE) exposure for the foreign entity. The secondment/ deputation transaction between related parties would be subject to transfer pricing regulations and accurately structured to avoid non-compliance.

If someone wants to move outside India to take up employment, how will his tax status change in India? Tell us a few myths that such a person should be aware of to avoid any non-compliances. 

Generally, an Indian citizen who has spent at least 60 days in India during a given financial year and at least 365 days in the past 4 financial years is termed as a Resident & Ordinarily Resident (ROR) of India, making him liable to tax on his Global Income in India. 

For an individual, who is moving out of India to take up employment, the above condition of 60 days is relaxed and replaced with 182 days. In such cases, an individual leaving India for employment in a foreign country may qualify as a Non-Resident of India during the said financial year and will be taxed in India on his Income received/ accrued in India.

Generally, due to the lack of knowledge about the tax laws, Individuals travelling for work outside India are unable to correctly determine their Indian Residential Status and taxability and assume that income from foreign employment is not taxable in India. The same is not true in many cases.  

The provisions under the Exchange Control Law for residency are different and the banks may want to designate an Individual’s bank account as an NRE/ NRO account, which adds to the confusion for those who are not well-versed with the tax and foreign exchange laws. It also changes their eligibility to remit money outside India. 

While working outside India, you need not contribute to the social security scheme of that country in case India has signed a Social Security Agreement with that country and you have obtained a Certificate of Coverage from EPFO.