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Budget rubs salt on pink slip wounds as sacked staff will have to pay tax on compensation

Mumbai: In an attempt to significantly increase the tax base, the Narendra Modi-led government has proposed that if someone is laid off and receives a compensation, that will now be taxed as ‘Other Income’.

The Budget 2018 has proposed a wide range of income received — say non-compete payments (which sometimes did not fit the definitions of salary or profits in lieu of salary); or compensation when a job offer went awry would now be taxable.

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In plain words, if someone got the pink slip and received a compensation, it would now be taxed as 'Other Income'. Earlier, it was mostly considered as a non-taxable capital receipt.

 

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"As per the existing provisions of the Income-Tax Act, 1961, various types of compensation receipts are taxable as business income under clause (ii) of Section 28. The prevailing provision under Section 28 is confining its purview in relation to taxation of compensation keeping a large number of compensation receipts in connection with both business and employment out of the purview of taxation. It is leading to erosion of tax base and revenue loss,” CA Abhishek Soni, Founder, tax2win.in, told the Financial Express.

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It has been, therefore, proposed in the Budget 2018 to amend the Section 28 of the I-T Act to provide that any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract in relation to business shall be taxable as ‘Business Income’.

It has also been recommended to introduce the tax on compensation under Section 56 of the I-T Act. It means any compensation received or receivable, in the nature of revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract in relation to employment shall be taxable as ‘Other Source Income’.

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These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to assessment year 2019-20 and subsequent assessment years.

Thus, “dual changes have been suggested in this Budget in relation to the receipt of compensation. One is broadening the scope of the existing tax on compensation in relation to business under Sec 28 and another one is taxing the compensation received in terms of employment for the first time under Sec 56. The object of this modification is to widen and deepen the tax base. These amendments will take effect from 1st April, 2018,” Soni told the financial daily.