Economy

Tips are not salary income, still taxable: SC

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Apex court says employer is not obliged to withhold tax on such payments made to employees

Remember the scribbling you made at the end of your credit card payment slip at the restaurant to tip the waiter? Well, this had become a bone of contention between a leading hospitality group and the taxman.

The matter landed in court, which passed a landmark judgment. The issue was whether tips constituted salary-income or income from other sources and whether the employer was obliged to ‘withhold’ the tax.

The Tax Authority, in this case the Commissioner of Income Tax (TDS), contended that such tips constituted the salary-income of waiters and the tax-payer (employer) was obliged to withhold taxes and remit them to the authorities.

The authority treated the taxpayer as assessee-in-default and sought to recover the tax shortfall with interest. It also levied a penalty.

Its contention was that tips from customers were salary-income of waiters as “profits in lieu of salary” and salary included salary paid or allowed to an employee by or on behalf of an employer.

Trustee role

However, the tax payer, ITC Gurgaon’s contention was that tips were received directly by the waiters from customers and the tax-payer merely acted as a trustee, collecting tips and passing it on to the employees.

Since tips did not constitute salary-income of the employees, the taxpayer had no obligation to withhold tax and could not be treated as a defaulter-assessee.

The apex court, in its recent ruling, held that since tips werereceived voluntarily from customers and employee-waiters had no vested right against the employer to claim any such amount, it did not constitute salary-income. There is no dispute that tips are taxable income, but it is income from other sources, the court said.

According to the court, the employer merely acts in a fiduciary capacity as a trustee for payments that are received from customers, which they disburse to their employees for services rendered to the customer.

The employer, therefore, has no obligation to withhold tax on such payments made to employees, regardless of whether the tips are received directly in cash, or collected through credit card by employer, and subsequently disbursed to employees.

ITC Ltd. was not available for comment on the issue.

Landmark ruling

Amarpal S Chadha, Partner & India Mobility Leader, EY said, “The present Supreme Court ruling is a landmark ruling which lays down certain fundamental propositions relevant to salary taxation.”

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Printable version | Dec 15, 2019 2:16:31 PM | https://www.thehindu.com/business/Economy/tips-are-not-salary-income-still-taxable-sc/article8552448.ece

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