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 Notification NO. 86/2019 Income-Tax

Treating tax cuts on reimbursements
January, 19th 2009

I am a consultant for a firm in Bangalore. I raise bills every month, including service tax and cess, and remit the service tax into the Government account. The firm has now started to deduct tax at source on the payments made to me, including the service tax. Do in need to treat the service tax also as income?

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I am visiting Bangalore at least twice every month and claim reimbursement of train fare and local conveyance. The firm is deducting tax on the reimbursement of expenses. I am not claiming the expenses in my computation of income as I am getting it reimbursed.

Is the firm correct in deducting tax at source on the reimbursement of expenses? S. Ramasubramanian, email

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Apparently, your income by way of consultancy charges would be chargeable to tax under the head profits and gains of business or profession.

You may note that section 145A of the Income Tax Act provides that the valuation of purchase, sale of goods and inventory in respect of the income chargeable under this head should include the tax, duty, cess or fee paid or incurred by the assessee to bring the goods to the place of delivery as per condition as on the date of valuation to be included in the valuation. This, however, would not apply to you as your income is through consultancy, which does not include purchase and sale of goods. You may, therefore, treat service tax as part of your income by crediting it to the profit and loss account and as expense by debiting it in your profit and loss account.

You may choose to account the service tax as a balance sheet item without routing it through your profit and loss account.

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In any case, you may note that the provisions of section 43B would be applicable to the service tax as well. Section 43B provides that any tax, duty, cess or fee will be allowed in the year in which it is payable only if it is paid in the previous year or before the due date of filing the return of income for that year. If it is paid beyond the due date for filing the return, it will be allowed as a deduction only in the year of payment.

Section 194J provides for tax deduction at source on any sum by way of fees for professional or technical services, royalty and non-compete fees. It can be argued that there would be no requirement for deduction of tax at source on the reimbursement as reimbursements are not sums by way of fees for professional or technical services, royalty or non-compete fee.

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It may, however, be noted that the board in a circular dated August 8, 1995, has clarified that as section 194J refers to any sum paid, reimbursement cannot be deducted out of the bill amount for the purpose of deduction of tax at source. Due to this, one can certainly understand that a deductor would not be willing to take the risk of not deducting tax at source on the reimbursements. To that extent it appears that the firm for which you do consultancy is taking the correct view on deducting tax at source on the reimbursement of expenses as well. You may, therefore, treat the reimbursement as your income and claim it as an expense as well.

A non-resident Indian who invests as fixed deposit in non-resident ordinary account out of the remittances is liable for deduction of tax at source by the bank on the interest from such deposits. On account of the Double Taxation Avoidance Agreement, the rate of deduction of tax at source varies from country to country. In such a case, is the non-resident Indian liable to pay tax in India if the interest income earned by him from such NRO deposits exceeds the amount not chargeable to tax? M.C. Sreenivasan, email

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Tax need not be charged on the interest income at the rates prescribed in the Finance Act when the Double Taxation Avoidance Agreement provides more beneficial treatment. Where tax is deducted at source at the rate provided in the Double Taxation Avoidance Agreement, you may not have to pay more tax on the interest income even if it exceeds the amount not chargeable to tax.

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