Reimbursement of Expenses

REIMBURSEMENT OF EXPENSES

• Employees will occasionally need to spend their own money when incurring expenses on behalf of your firm. The corporation must refund them for these payments quickly and in full, both morally and legally.
• However, This does not imply that employees are entitled to repayment for every payment they make. Set explicit standards for what constitutes as a reimbursable expense to keep things fair and transparent.
• The cost must have a distinct business purpose. It should be a purchase related to an employee’s services to his or her employer – in other words, anything that an employee requires to accomplish his or her work.
• This is a broad definition that might include everything from a hotel stay during a business trip to a second display for their work Computer.
• Because the rules vary slightly from one place to the next, make sure to verify your local legislation for the most up-to-date legal meaning.
• Second, they must have proof of payment in the form of a receipt, invoice, or other kind of proof of purchase.
• The information that must be presented on the record in order for it to be legally valid varies by nation, but it must include the total price (including tax), the time and place of purchase, and a description of the goods or service provided at the very minimum.
• Finally, any reimbursable payments should always be reported to the appropriate department in a timely manner.
• Any excess funds from the original reimbursement should be returned to the employer within the same time frame.
• If an expense meets these requirements, it may be eligible for a tax deduction.

Taxation of Reimbursement of expenses

• Generally, foreign company raise debit notes on their Indian subsidiary/ associate companies for certain expenses paid by them on behalf of Indian Companies.
• If these expenses would have been directly incurred or paid by Indian Company, the same may be taxable in India, depending on the applicable Domestic Law provisions & DTAA provisions.

Some of these expenditures are:

• Reimbursement of relocation expenses of outbound employees : Non-taxable
• Per-Diem Allowance during employee stay abroad: Non-taxable
• Payment for Link Charges: Non-taxable
• Reimbursement of management expenses to parent company: Non-taxable
• Payment for Cargo communication facility: Non-taxable
• Reimbursement of technical expenses-Cost Allocation: Non-taxable
• if the Reimbursement of Purchase service charges: Non-taxable
• Reimbursement of travelling expenses as FTS: Taxable
• In case Reimbursement for marketing services: Taxable
• Reimbursement of Travelling Expenses: Non-taxable
• In case the reimbursement of travelling expenses as FTS: Taxable
• Reimbursement of Audit fees: Taxable

Conclusion:

• If the main expenditure is not chargeable to tax in India either under IT Act or DTAA, then reimbursement of such expenses will also be not chargeable to tax in India.
• Similarly, if the main expenditure is chargeable to tax in India then the reimbursement of the same shall also be chargeable.

Employer arranging transportation services/facility

When Employer arranging transportation services/facility for his employees does not cover under definition of business. under Central Goods and Services Tax Act, 2017 (“the CGST Act”). 

the AAR of Maharashtra In the matter of M/S. Integrated Decisions and Systems (India) Pvt. Ltd. held that arranging transportation for employees is not an activity that is incidental or ancillary to the activity of software development, nor can it be called an activity done in the course of or in furtherance of software development because it is not integrally connected to the business in such a way that the business would not function without it.

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