How new LTC exemption can support economic recovery; GST collections, digital usage may get a boost

Gaurav Mohan

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Leave Travel Concession (LTC) is a common element of compensation adopted by employers to remunerate employees for availing tax benefits. This forms part of the salary paid by an employer to employee travel within a country. LTC amount is a tax-free allowance provided to the employees subject to various conditions. The exemption can be taken twice in a block of four years for the actual journey undertaken with the family. This exemption is only valid for domestic travel and not for international travel, sightseeing, or accommodation expenses. However, due to the global pandemic, employees are unable to make travel plans and thus are unable to avail of the tax benefits. Even though in India, unlock is in progress, but leisure travel shall still be avoided. Taking into consideration, the government has come up with an innovative solution where an employee can avail of the tax benefits of LTC without having to make the actual travel.

Thereby, to compensate the central government employees, the government has decided that the cash equivalent of LTC, comprising leave encashment and LTC fare of the entitled LTC, may be paid by way of reimbursement that shall be eligible for income-tax exemption on the lines of existing income-tax exemption available for LTC fare. Earlier, the benefit was only limited to the central government employees, however lately the benefits are extended for the non-government employees subject to a maximum limit of INR 36,000 per person as deemed LTC fare.

Further, the outbreak of the Covid-19 pandemic has also brought in a phase of lockdown, leading to the disordering of several sectors in India that are severely affected. The pandemic has adversely affected the demand in several sectors especially hospitality, travel, and tourism. Even after unlocks, many sectors are still unable to recover due to the reason of consumer worries about the present situation and lifestyle changes.

Demand in the economy has fallen, which is a key driver of an economy. Only if people spend more can more jobs be created for meeting the supply for the demand. So it’s crucial for the government to stir the demand for which the finance ministry has used the income tax benefits as a tool. To make this a win-win situation for the economy and all other stakeholders, the government has come up with a strategy to boost up the economy by escalating the consumption expenditure and providing the employees with an opportunity to avail the benefits of Leave encashment and LTC.

The exemption in respect of income-tax for the receipt of deemed LTC fare is subject to fulfillment of the following conditions:-

a) The employee exercises an option for the deemed LTC fare in lieu of the applicable LTC in the Block year 2018-21.
b) The employee is required to spend a sum equals to 3 times the value of the deemed LTC fare on the purchase of goods/ services which have a GST rate not less than 12% from a GST registered supplier during the period from 12th October 2020 to 31st March 2021.

If an employee spends an amount less than three times the value of the deemed LTC on the specified expenditure, the amount of deemed LTC fare and related income-tax exemption shall be reduced proportionately. Similar conditions are applicable to government employees in addition to LTC, the government employee has to avail the leave encashment amount as well.

India is a global leading market and is emerging towards the $5 trillion economy by the year 2024-2025, a plan of the Modi Government. This cannot be possible until the government meets its monthly target of GST revenue. In October, the GST collection crossed a milestone of 1.05 lakh crore, the first time after February this year. To maintain consistency in GST revenue collection, the government needs to make every possible transaction under the GST ambit.

However, the end consumers may try to avoid purchase from the registered dealer as they will unwantedly be burdened with the tax, and move towards the grey market where they need not carry such a burden. To encourage such individuals for purchasing goods or procuring services from a registered vendor under the GST which not having a tax rate of less than 12% is a strategy to boost the economy by escalating the consumption expenditure. Procuring from a registered supplier under GST shall also lead to a higher collection of GST revenue. Further, the employees also get an opportunity to avail the benefits of LTC under the Income-tax act.

According to a survey, Indian Railways has suffered a loss of Rs 6,500 crore on revenue earned from ticket sales due to Covid-19, and 53% of the total leading hotel operators have shut down more than 80% of their inventory during the nation-wide lockdown period. There are numerous cases where businesses are shut down due to the missing demand in the market. In case employees sustain their expenditure to avail the benefit of LTC shall help the economy to overcome the impact of the covid-19 situation which we are observing for the past few months where the demand does not meet with the production.

The step has a very wider scope where the individuals are not only encouraged to purchase from the registered vendor but also encouraged to make payment through digital mode. This is an integrated step to promote a cashless economy while availing of the LTC exemption.

The move seems to be well coordinated to hand out income tax benefits while stirring the demand, increasing GST revenue, and promoting a cashless economy. Hoping, the government will develop many more similar synchronized policies that aim to benefit the common man and simultaneously help the Indian economy and ultimately make India a self-reliable economy ‘an Atmanirbhar Bharat’.

Gaurav Mohan is CEO at AMRG & Associates. Views expressed are the author’s personal.