Tax on pay arrears: Rs 1,400 crore bonanza for govt

The government will mop up Rs 1,400 crore (Rs 14 billion) this fiscal by taxing the second instalment of arrears due to central government employees, who were awarded increased salaries by the Sixth Pay Commission.

The first instalment of arrears (representing 40 per cent of the increased pay) was disbursed during financial year 2008-09.

The employees will also have to pay two per cent education cess on the total amount of the arrears.

"The total arrears for this fiscal is Rs 18,000 crore (Rs 180 billion).

The arrears that would fall in the tax net would be about Rs 9,000 crore (Rs 90 billion). Barring the grade-IV employees, and according to calculations, around 15 per cent of this amount-- about Rs 1,400 crore (plus education cess) would go into government's coffers during this fiscal as tax," a senior finance ministry official said.

"The Central and State government and various organisations under them are advised to compute the correct tax liability of every employee on second instalment of arrears drawn by him and immediately recover the full tax liability along with education cess thereon at the rates in force," a recent CBDT circular asked all government employers.

Distribution of the remaining 60 per cent of arrears has already begun.

The I-T department has received the TDS on arrears from various government departments, while the rest would be received soon, the official said.

"The deduction of tax at source on such arrears payment should not be deferred in any circumstance. They (employers) should further ensure that the tax so recovered is paid to the account of Central government account immediately as per the Income Tax Rules, 1962," the CBDT circular said.

The total arrears, accumulated after the Sixth Pay Commission recommendations, were Rs 12,000 crore (Rs 120 billion) during 2008-09 fiscal, the official said.

The government has also said that employers "should ensure that the PAN details of the deductees (recipient of arrears) are correctly quoted in the relevant quarterly e-TDS returns filed by them so that government servants get proper credit of their tax deducted in their respective income tax returns."

Those who (employers) fail to comply with the provisions of Section 192 of the Income-tax Act, 1961 would be liable to pay interest under section 201 of Income Tax Act along with other penal consequences.