Remove Section 36(1) (va) of the Income Tax Act from inception

 Suggestions for the Pre-budget Memorandum on a matter affecting Employers and thus Trade and Industry

Introduction: The article delves into the pre-budget memorandum, advocating the removal of Section 36(1)(va) to ensure fair treatment of employer contributions. Specifically, it focuses on Section 43B of the Income Tax Act,1961, addressing concerns related to Provident Fund and ESI contributions.

1. Under Section 43B of the Income Tax Act,1961 employers’ contributions to the Provident Fund and ESI are allowable if paid on or before the due date for filing the IT Return. Under Section 36(1) (va) of the Income Tax Act, in the case of employees’ contribution, they have to be credited to the employees’ accounts in the funds on or before the “due date”. The “due date” has been defined under that clause as the “date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise”. If the credit to the employees’ account was not made by such a due date, even if the credit was made subsequently, deduction of the expenditure would not be allowed.

2. At the time of the amendments in the year 1987, contributions to the welfare funds were being collected manually unlike today when the payment is made electronically. In those days even if the payments were to be made on or before the due date for payment under the relevant legislation, the amount would lie with the fund without reaching the employees’ accounts. The amounts would be credited to the employees’ account only when the employer communicated the details of the employees, their monthly contributions and the employer’s monthly contributions through a return. In the case of Provident Fund the details were to be communicated through an Annual Return in form 6A along with the employee wise contribution cards recording the contribution made in respect of each employee during the period April to March and the said Annual Return and contribution cards were to be submitted by the employer as per Section 38(3) of the Employees Provident Fund Act, 1952 on or before April 31st of the following year.

3. The Income Tax Department, since the inception of Section 36(1)(va) has been denying deduction for employees’ contribution to the Provident Fund, even if there is one day’s delay in remitting the contribution beyond the due date for remittance specified in Section 38(1) of the Employees Provident Fund Act, 1952 without consulting the Ministry of Labour as to what is the due date for credit of contributions to the employees accounts in the funds, as mentioned in Section 36(1)(va),. This is creating hardship to employers and an unjust enrichment for the Department. Hence the Income Tax Department be called upon to clarify the “due date” for credit of contributions to the employees accounts in the funds, as referred in Section 36(1)(va) from the Ministry of Labour and Employment in the year 1987 when the said clause was introduced.

4. For the reasons below there should not be any distinction between the treatment of employers’ contribution employees’ contribution and both should be allowed under Section 43B if paid on or before the due date for submission of the Income Tax Return

a. The Central Government by amendments to the Finance Act, 2021 moved amendments to Section 36(1)(va) and Section 43B to clarify that these provisions are separate. The difference in treatment between employees’ contribution and employer’s contribution was explained in the Memorandum explaining the clauses in the Finance Bill and also by the Finance Minister in the Budget Speech that these amendments were required for the following reasons:

1. Employees’ contribution was the employee’s own money and the employer was holding the same in trust.

2. Delay in crediting the account of the employee by the due date (for credit) would result in loss of interest to the employee.

b. On the first of the reasons given, by the Finance Minister in Parliament, there cannot be any distinction between employees’ contribution and employer’s contribution. Liabilities which are crystallised are monies held in trust. They are not mere book entries. Once the employer’s contribution is due it also is money held in trust. Similarly bonus declared by an employer, GST collected from the customer by a supplier are monies held in trust. If the supplier does not remit the GST within time the customer will not get input tax credit due to him and would be put to undue hardship. However, time is granted upto the due date for filing the return to pay the bonus which has been declared or the GST under Section 43B. Hence there is no reason to make a distinction as regards the employer’s contribution.

c. There can be no loss of interest after the introduction of Sections 7Q in the year 1988: In the year 1988, by an amendment act, Section 7Q was introduced in the Employees Provident Fund Act, providing for payment of interest at 12 percent or such higher amount as may be provided in the Scheme on delayed remittances by the employer. The then government of the day assured the Parliament that no interest would be lost by any employee for any delay of remittance by the employer as the fund would use the interest recovered under Section 7Q to pay the interest to the employees as if there had been no delay in remittance. This practice of crediting the full interest to the employee’s account, even though the contributions are delayed, is being followed as of today. Hence, if the employee is losing interest on account of delay in remittance, though 12% interest recovered from the employer then suitable clarification in this regard must be obtained from the Ministry of Labour. After payment of huge interest on the delayed remittance of contributions, it is an injustice to the employers if they are denied credit for a genuine outgo.

d. Even otherwise a small delay should not result in loss of interest : The interest for a month is based on the opening balance and remains the same whether the contribution is paid on the first day or last day of the month. Further, the credit of interest to the account of the employee is made much after the end of the year when the Board of Trustees of the Provident Fund in consultation with the Government determine the interest to be paid.

e. The employers are least interested in retaining the “Employees Own Monies” with them. Employers are only performing a duty entrusted to them by the Government to secure the welfare of the employees. They would happily pay over both the employers and employees contributions to the employee and ask him to remit the same to the fund. The employers have onerous responsibilities under various labour welfare legislations. If there is a small delay it is because of various reasons:

i. The system of payment of monthly contributions via the electronic mode introduced in the year 2012 requires the employer to make payment using an Electronic Challan cum Return wherein remittance is possible only if the challan contains details of the remittance for each employee. This was an obligation to be completed by April 30th of the following year in the manual era.

ii. With the introduction of Electronic Challan cum Return the employees’ account will get credited immediately on payment. Hence there is no apprehension that the employees’ own money will not reach the employee.

iii. Most of the reasons for delay in remittances made in electronic mode are beyond the control of the employer:

• • • Details required to be entered in the challan before making the payment
    • Connectivity and software issues.
    • In the case of new employees, who do not have a unique account number, remittance by the 15th of the following month is not possible till they obtain the number. Such employees must possess an Aadhar. If not, they have to obtain an Aadhar. Hence remittance of contribution in the case of such new employees is being remitted after a delay of two or three months and their contributions are not allowed as a deduction u/s 36(1)(va) for those months. This is a problem which affects manpower suppliers and industries which employ migrant labour.
    • Delay in receiving payments from customers.

Hence it would be unfair to penalise them for a few days delay in making the payment online.

f. Lastly, in the case of ESI, employees do not have an account in the said Fund to which their contribution can be credited and their contribution does not earn interest. Hence disallowing employees contribution for a day’s delay on the ground that it is their own money and that they lose interest is against logic..

Accordingly, there should not be any distinction between the treatment of employers’ contribution employees’ contribution and both should be allowed under Section 43B if paid on or before the due date for submission of the Income Tax Return