Under current taxation laws, 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, 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, writes The Economic Times.
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.
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.