It is welcome news that private-sector employees who choose to spend their leave travel allowance (LTA) on the purchase of white goods, home appliances, and other consumer products that attract a goods and services tax (GST) rate of 12 percent and higher, along the lines of the latest package rolled out for the central government staff, will be eligible for tax breaks.
In a bid to crank up demand by incentivizing government employees to spend more, Finance Minister Nirmala Sitharaman has announced giving out cash vouchers to central government staff this year in lieu of leave travel concession (LTC) fare which could be spent only on buying non-food GST-rated items.
“Tax benefit would be available… The mechanism is being examined and a clarification would be issued shortly,” a government official with direct knowledge of the matter told ET. Further, the Centre wants that private-sector employees to take benefit of the scheme that seeks to boost consumption, and this scheme to the private sector employees will generate additional consumer demand of Rs 28,000 crore.
It is worth mentioning here that central government employees will need to spend three times their entitlements by March 31, 2021, in order to qualify for the tax exemptions they get. For government employees, leave travel concession (LTC) is tax-free in two years out of a block of every four years. For private-sector employees, the tax break is available only twice in a block of four years if an employee can furnish proof of travel. Without proof, the employee gets the amount after tax is deducted.
The industry said the finance ministry should clarify how private sector staff can take advantage of the scheme without any change in the income tax provisions or a clear directive. There is a difference of opinion among tax consultants over the matter of whether the government can extend the benefit by issuing a circular.
The financial daily quoted Neha Malhotra, director, Nangia Andersen LLP, as saying, “Central Board of Direct Taxes may issue a circular notifying an amendment to the Section 10 (5) of the Income Tax Act, 1961, and Rule 2B, income tax rule, 1962, providing that the private sector employees can claim tax exemption for the Leave Travel Assistance (LTA) if the said amount is spent for certain specified purposes.” She further added that the circular can be later included in the next Finance Bill.
The government will have to amend Section 10(5) of the Income Tax Act as this section has a proviso limiting the exemption, and it can’t surpass the amount of expenses actually incurred on such journey, the publication cited Ved Jain, former president of the Institute of Chartered Accountants, as saying. Plus, he said the Centre may include this amendment in the next budget.
At present, it is not clear whether employees of the private sector will also need to spend three times their LTA entitlements to avail of the advantage and whether those that had chosen for the new exemption-free income tax regime will also be entitled to it.
The official told the daily that the matter is being examined and will be clarified soon.