TIBS Blog

The opening sentence of Section 192 of the Indian Income Tax Act is presented as follows. Please click here to see the source.

192. (1) Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the [rates in force] for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.

The section states that tax on salary shall be deductible at the time of salary payment. No problem about that.

It gets a bit confusing when one reads the phrase “….income-tax computed on the basis of the [rates in force] for the financial year in which the payment is made,…” in the above excerpt.

When salary payment is made within the same financial year, the tax rates in force for the financial year should be used for tax computation, according to Section 192. So far, so good.

But what if salary, which accrues on March 31 of a year, is paid out in the first week of April (the beginning of the next financial year)?

There are many organizations that pay salary — that accrues on the last day of a calendar month — in the first week of next month. If one were to go by the letter of Section 192, in such organizations, until February salary, employees’ salary should be taxed as per tax rates prevailing in that financial year. But the March salary paid in April will have to be taxed as per the rates for the next financial year (starting April).

Even if salary is paid on the last day of March, final settlements for employees who leave an organization in March may be processed only in April or later. In such cases too, the words that describe Section 192 give rise to confusion.

What is the confusion about?

The way Section 192 is worded puts it in conflict with Section 15 of the Income Tax Act which states that taxability on salary arises whenever salary is due/accrued or paid, whichever is earlier. In case of fixed heads of pay such as Basic pay, salary accrues on March 31, and taxability arises on March 31 according to Section 15. While the tax may be deducted in April or later, whenever the salary is paid, the amount of tax calculated should be as per the tax rates that prevailed in March.

Organizations tax salaries that accrue in March as per tax rates for that financial year ending March, in accordance with Section 15, whether the salary is paid in April or later. If one goes by the (poorly worded) section 192, such organizations can be viewed as deducting tax in contravention to Section 192.

Software developers, at the time of testing software, use what are called test cases to check if a software application works as per the functional specification the software is expected to meet. A test case is a set of rules/conditions which a developer applies to check if the software is functioning as expected. It is important for law makers to apply test cases while drafting a law in order to check if the words fully and accurately convey the intention of the law.

Section 192, the way it is currently worded, fails the test case of March salary paid in April.

A well worded law goes a long way in ensuring compliance with the spirit of the law. On the other hand, a poorly written law increases the cost of and lowers the likelihood of compliance.