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Work from Home: A Convenient Way of Saving Taxes

Tax planning as the word suggests, is a smart way of saving your taxes by incorporating the relevant expenditures to your book of accounts and getting tax benefits out of such planning . It is a very common phrase that "modern problems require modern solutions" and this statement has become even more relevant during the times of the Covid -19 pandemic which left the world awestruck due to its massive impact on the lifestyles of people.

While the pandemic took a huge toll on the economy of the world at large it also added a new way of working to people's life and that is work from home. Even though this concept is relatively new to most of us in India , this has been tried and tested previously by some countries around the globe to ascertain the degree of productivity that it brings to the table. This concept has been tried by AT&T in 1994 where it let 32,000 workers work from home[1] and this practice has proved beneficial for them in terms of cash flow and has also increased the productivity of their employees.

While this practice has benefited companies in the United States, the outcome of this sort of a set up is fairly welcomed by some of the people in India as well, these people have been adapting similar practices where their place of residence is their office as well. Many people who engage in consultancy and similar sort of business activities like doctors, lawyers, Chartered Accountants choreographers etc. use their home premise as their offices because of the comfort and the time it saves for them.

This paper will take help of one such example where a celebrity choreographer incorporated such practice and saved her taxes at the ease of her residence and moving on further, this paper will discuss the work from home provisions which are present in other jurisdictions and try to analyze whether these practices could prove to be useful in a long-term and what possible outcome it may bring.

Farah Khan's Case

Farah Khan who was the assessee in the case[2], is a famous Indian director and celebrity choreographer. She owns 6 flats in Mumbai which she uses as residence cum office premises, she has bifurcated her flats as being used for office and residential premises.

In the assessment year 2013-14, the assessee claimed deduction of expenditure under different heads such as: Interest on office loan, depreciation on office premises, depreciation on furniture and fixtures, society charges, electricity bills (50% since half of the area was being used as office) etc. which amounted to INR. 155.74 lacs.

The interest on loan which to acquire office premises was claimed under section 36(1)(iii) of the Income Tax Act 1961-2021 (hereinafter referred to as 'the act') which allows for deductions with respect to the amount of interest paid on the loan for acquiring an asset for business or professional use.

The claim of depreciation was made under section 32 of the act wherein section 32 (1)(i) allows for depreciation on furniture (for office use) to be deducted while calculating the income. The society charges and electricity charges were claimed under section 37(1) of the act. The case of assessee was discussed at length and after the assessee was able to come up with documentary evidence which could clearly ascertain the validity of her claims pertaining to the usage of the area in question for office use, the claim was finally accepted by the tribunal.

The learned court in this case relied on the following cases and principles:
  • Rule of Consistency:
    The rule states that a taxpayer be true to any representations made at the time of their tax return. If these representations end up differing, then there is a doubt casted on the substance of the labels affixed to the transaction and since the assessee has claimed deductions under the same heads in previous financial years by the same court it is well within the court's power to allow the same in the concerned year as well.
     
  • Block of Assets Rule:
    In ACIT v. M/s Krystal Colloids Private Ltd.[3], the Mumbai Tribunal held that once an asset is included in a block of assets and depreciation is awarded on that block, following years cannot be refused on the basis that one of the assets is not used by the assessee in some of the years. The term "user" of assets must refer to the block as a whole, not to an individual item.
     
  • CIT V Western Outdoor Interactive Pvt. Ltd:
    It was decided that if a benefit or deduction is available for a specific number of years after meeting certain conditions and according to the Act, then the AO cannot withdraw the relief for subsequent assessment years without withdrawing or setting aside the relief granted for the first AY in which claim was made and accepted.

Work From Home In India

Owing to the circumstances that the pandemic brought forth in the world, Indian people who work in offices also expected some sort of tax relief from the union budget 2021 regarding work from home, since they were incurring extra costs such as that of electricity, WI-FI, snacks, and fitness centers which in some cases the office would have provided them in case of a physical office.

But no such relief pertaining to deductions in tax for salaried employees has been granted yet. In India if someone wants to make an office cum premise, then they have to follow certain steps like taking a permit from Residence welfare association or if the flat is rented, one needs the approval of the landlord. But in most of the professions where one provides their expertise in a matter like that of a lawyer, doctor or C.A. or even Yoga classes, such activities are not deemed as commercial and till now the definition of commercial activities from home have not been structured in a way to fit the present day definition and usage of such term.

And the there is a grey area in the Indian Income Tax regarding the work from home provisions which clearly mention and classify the scope of online work mode where an employee is sitting in their home office and working for a firm in abroad or where a foreign company has just appointed a consultant in India to assess the market and that employee is working from home.

Other Jurisdictions
Germany- German employees who incur costs that aren't reimbursed but are properly documented and necessary can claim them as a deduction, including professional dues, work equipment, and even business literature. Examples of these expenses include: Workers who have changed to working from home will be able to deduct 5 Euros for each calendar day they work from home in 2020-2021 and 2021-2022. However, this deduction is limited to 600 Euros per calendar year and can only be claimed for 120 days.

United States:
In the United States, self-employed individuals who effectively use their house for business purposes can deduct any expenses made for the purpose of the business, including interest on the mortgage, rent, depreciation, office supplies, and any money spent on repairs. However, it is critical to highlight that this portion of their home must be used as their primary place of business 'regularly and exclusively.'

It's worth noting that the American Federal Tax Code allowed employees to lower their tax liability on their income by deducting all costs and expenses associated with operating their office/residence and any other employee expenses not reimbursed. This, however, lasted only until the Tax Cuts and Jobs Act of 2017 took effect.

United Kingdom:
In the event of a taxpayer who is self-employed and works from home in the United Kingdom, he may be entitled to claim a percentage of expenses incurred by him, such as power charges, mortgage interest or rent on the property, internet expenses, and so on. Additionally, the taxpayer would need to determine and implement a legitimate manner of dividing the expense, for example, he would need to demonstrate the expense incurred for business reasons while working from home.

Employees may deduct additional residential expenses such as energy, water, and internet charges if they work frequently and regularly from their home.

Their tax rates are as follows:
  1. 6 per week, effective April 6, 2020; however, it would be 4 per week for earlier Assessment Years. They would, however, be forced to keep track of any additional costs or expenditures.
  2. Alternatively, they can claim the precise amount of the additional costs they incur on a weekly basis, but they must keep track of and provide evidence of the same in the form of receipts or bills.

Australia:
The Australian government permits taxpayers to claim deductions for costs incurred in the course of their employment. However, the employee must be working from his or her home residence in order to carry out and fulfil his or her occupational duties and responsibilities, which does not include performing minimal functions such as answering calls or responding to emails, and they must be incurring additional expenses as a result of working from home.

Numerous methods for calculating such claims include the following:
  1. Fixed Rate Method:
    Allows taxpayers to claim 52 cents for each hour worked from home. This is done to compensate for the cost of their office/home furniture, additional power and gas prices for controlling the room temperature and lighting, and maintaining the office/home, among other things.

    Expenses like as internet charges, stationery, computer consumables, and depreciation on office equipment such as laptops may also be deducted in addition to the 52 cents maximum.
     
  2. Actual Cost Method:
    Allows taxpayers to claim the actual cost of costs incurred purely as a result of working from home, such as depreciating assets, internet charges, electricity charges, and stationery.
    Additionally, with the commencement of the Covid-19 Pandemic, the government provided taxpayers with a "Shortcut Method" that, while transitory in nature, allows taxpayers to claim up to 80 cents for each hour worked from home.

Conclusion
Working from home is a convenient and productive way of working which has become the need of the hour due to the prevailing situation of pandemic and even the rapid changing technology which enables anyone to remotely work on a shared document with a lot of other people or have meetings anywhere making even a beach look like an office by simply adding a background on an app, but this concept is something that is not yet fully recognized with respect to the taxation laws in India unlike the other countries.

The need to create laws governing such a format of business is crucial as it would pave a way for the tax base being wider by including more people under the ambit of it and at the same time people can use the deductions for their benefit. There are chances that people will avoid taxes by using the work from home laws as they might just use the space for office and other purposes, deriving unfair advantage of the law, but merely because of that factor the changes in this law should not be ignored.

The case of Farah Khan has given a new ray of hope for people working from home as they will be able to now use their premises as they were using before but still derive benefits out of that setting it would not only help in increasing the productivity of people working from home as pointed out in the AT&T[4] case study, but it will also reduce the traffic on roads and curb pollution if people can avoid going to offices when they can do the same thing from home.

This would eventually shift many offices to a remote working model such as call centers where physical contact is not required which in turn can help in solving the problem of space in the market as the offices will be reduced in terms of size and there would be more of free space in the market leading to somewhat affordable real estate.

End-Notes:
  1. Mahlon Apgar, 'The Alternative Workplace: Changing Where And How People Work' [1998] Harvard Business review
  2. Mumbai vs M/S Farah Khan [2021] Income Tax Appellate Tribunal - Mumbai, Acit Circle-16(1) (Income Tax Appellate Tribunal - Mumbai).
  3. Mumbai vs Krystal Colloids PLtd [2018] Income Tax Appellate Tribunal - Mumbai, Asst Cit 15(2)(1) (Income Tax Appellate Tribunal - Mumbai).
  4. Mahlon Apgar, 'The Alternative Workplace: Changing Where And How People Work' [1998] Harvard Business review

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