959. Clarification regarding deduction of tax from payments of additional pay, allowances and arrears to Central Government employees following the Notification based on recommendations of the Fifth Pay Commission
Circular No. 758 was issued by the Central Board of Direct Taxes on 7 November 1997. Its subject is 959. Clarification regarding deduction of tax from payments of additional pay, allowances and arrears to Central Government employees following the Notification based on recommendations of the Fifth Pay Commission.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Tells Drawing and Disbursing Officers of the Central Government and its organisations to recompute each employee's correct tax on the Fifth Pay Commission arrears, recover the full amount at once, and pay it into the Central Government account by 20 November 1997. It records that many such officers had deducted on the arrears in an ad hoc manner rather than in full, which is a gross violation of the Act and can attract penal consequences including prosecution, and warns that failure to comply with section 192 read with the earlier circulars attracts interest under section 201(1A) and other penal consequences. The manner of computing the deduction is that in circular No. 757 dated 20 October 1997 read with circular No. 756 dated 10 October 1997, the latter being printed with it: under section 192 tax is deducted at the average rate for the financial year of payment on the estimated income for that year, and officers must deduct properly not only on the additional pay and allowances but also on the arrears, many employees having entered the tax net or moved into higher brackets because of the revision.
It had come to notice that a large number of Drawing and Disbursing Officers had not deducted the full tax on the arrears paid on the revision of pay scales.
959. Clarification regarding deduction of tax from payments of additional pay, allowances and arrears to Central Government employees following the Notification based on recommendations of the Fifth Pay Commission
1. Under the provision of section 192 of the Income-tax Act, an employer is required to deduct tax at source from any payments in the nature of salary which includes, inter alia, any arrear payments. The manner of determining the amount of tax to be deducted at source from these payments is set out in Circular No. 757, dated 20th October, 1997 issued by the Central Board of Direct Taxes read with Circular No. 756, dated 10th October, 1997.
2. However, it has come to our notice that a large number of Drawing and Disbursing Officers have not deducted the full quantum of the tax liability on the arrears paid to Central Government employees as a consequence of the recently announced revision of the pay-scales. The deductions have been made in an ad hoc manner. This is in gross violation of the provisions of the Income-tax Act and is liable to attract penal consequences including prosecution.
3. All Drawing and Disbursing Officers in the Central Government and various organisations under it are advised to recompute the correct tax liability of every employee, on the arrears drawn by him and immediately recover the full tax liability thereon. They should further ensure that the tax so recovered is paid to the account of the Central Government by 20th November, 1997.
4. Drawing and Disbursing Officers who fail to comply with the provisions of section 192 of the Income-tax Act, read with the above-referred Circulars, would be liable to pay interest under sub-section (1A) of section 201 of the Income-tax Act and to other penal consequences under the said law.
Circular: No. 758, dated 7-11-1997.
CLARIFICATION ONE
1. The Central Government has recently notified new scales of pay and allowances for different categories of Government employees based on the recommendations of the 5th Pay Commission. In addition, the employees will be entitled to substantial amounts of arrears. As a result of this increase, many employees whose incomes according to the old pay scales were below the taxable limit would now enter the tax net. Many other employees would move to higher brackets for application of the tax rates.
2. As per section 192 of the Income-tax Act, 1961 the person responsible for paying any income under the head ‘Salaries’ is required, at the time of payment, to 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 for that financial year.
3. All DDOs must, therefore, ensure that proper and adequate tax is deducted from the disbursement to employees of not only additional pay and allowances but also of arrears payable to Central Government employees as a result of the implementation of the revised pay scales.
Circular : No. 756, dated 10-10-1997.
In a section 201 and 201(1A) proceeding against a Government office for short deduction on pay revision arrears.
Source: the Income Tax Department’s own published text — its page for this instrument.
