Let us look at a couple of questions first. Do employers have the right to deduct taxes? Do they have the right to provide exemptions to an employee to reduce the tax burden, or in some cases, do not need to with hold any taxes? Do employers, in a way, take upon themselves to perform the duties of an income tax officer by interpreting the law? Can they demand for supporting or additional documents while extending tax exemptions? How is an employer protected from any misinterpretation of rules or procedures or documentation?
Well, with regards to the rights, the Income Tax Act merely states that an employer is required to withhold taxes at source as per the prescribed rates and in accordance with the income earned by the employee. Post which, the employer is required to remit the withheld taxes to the government treasury within stipulated timelines. Lastly, the employer is required to submit returns at regular intervals to the government, while one annual statement should be issued to the employee indicating the income paid, taxes withheld and remitted during the year.
Though there is no explicit note or a clause in the Act that states the employers will have to perform the duties of a tax officer, the rules simply binds them to the law and automatically provides the powers to withhold appropriate taxes from employees to the extent of compensation paid or benefits provided and remit it to the government. There are no additional powers extended to the employer that an income tax officer enjoys, such as assessing personal tax liability or right to demand information on other personal income or wealth, etc.
Many countries across the globe have enforced this process of withholding taxes where the employer is bound by law to withhold taxes on income paid to the employee. Countries like Australia call it as PAYG or ‘pay as you go’ or in the UK, it is known as PAYE or ‘pay as you earn’ to ensure there are no residual taxes to be paid by the employee at the end of the financial year.
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However, in a country like Hong Kong, the onus of paying tax lies with the employee. The employer need not withhold taxes on income but has an obligation to file the annual returns indicating the amount of income and benefits paid to the employee. The income tax department will, in turn, compute the taxes and notify the employee directly.
Is it true that one cannot escape death and taxes? While it could be true of death, it may not be so on taxes, especially if you are living in UAE or Bahamas. Those countries do not impose taxes on earning for their residents! How cool is that?
While some of us might not be so lucky to enjoy a total tax-free environment, the least we can do is to try and reduce (or in some cases, even nullify) the element of tax liability through prudent investments in tax-free bonds and instruments. Sec.80 of the IT Act provides a series of options through which one can not only save on taxes but help themselves to build up a good corpus for their future.
So, coming back to the question on the rights of an employer to provide tax exemption on behalf of the income tax department, similar rules as the ones mentioned in the earlier paragraphs apply here too. While it is true that employees have the right to claim for tax exemptions, employers still have an obligation to demand relevant documents in support of the claims and check them to their satisfaction. If not fully satisfied, additional proofs need to be provided by the employee as appropriately demanded by the employer.
There is an option for employees to first declare their intent or plan to invest in tax saving instruments before the end of the financial year. The general practice adopted by most employers is that they obtain signed declarations at the beginning of the year. Based on this declaration, tax exemption is provided under the assumption that the employee will actually invest at a later date and provide supporting documents as proof.
Keeping in mind the processing time required by the employer to scrutinize these documents - which is an additional task apart from the normal quota of payroll activities to be performed - a reasonable window of timeline is generally provided to employees to submit their proof of investments in line with their declarations.
The employer has the right to reject the claims if employees have not been able to submit their documents within the stipulated timeline or if it is found to be invalid. In this situation, the employer has no option but to deduct the appropriate tax liability from the employee to the extent of invalid documentation. On the other hand, the impacted employee has an alternate option to claim the tax exemption by submitting correct documents directly to the income tax department at the time of filing their annual returns and claim a refund.
Coming to the question of protection to employers from misinterpretation of rules or other instances like missing the deadlines, ignorance, oversight, wrong data, clerical errors, etc. Unfortunately, there is none, as one is expected to be fully compliant.
The only support one might get is that there are several helplines provided by the income tax department to seek guidance and clarifications. Also, many professional consultants offer this kind of support to organizations and help in constructing a good compliance process for a fee.
Additionally, many good payroll softwares are available in the market and one such software is greytHR, India's No. 1 HR and Payroll software which is already configured with the above statutory requirements, which in turn, help organizations to be fully compliant. As a part of their offerings, greytHR also constantly keep upgrading their software as and when the rules keep changing. These are some of the recourse that an employer can turn to, because non-compliance is not an option.