Under tax laws, an exemption has been granted for uniform allowance—given by an employer to employees. The exemption is for an allowance granted to meet the expenditure incurred on purchase or maintenance of uniform for the performance of the duties of an office or employment of profit.
There has been much debate as to what exactly constitutes a uniform. Many employers have taken a liberal view that even a dress code constitutes requirement of a uniform, and, therefore, an allowance given to comply with the dress code would amount to a uniform allowance.
Recently, the Gujarat High Court considered and interpreted the exact scope of this allowance in the case of a public sector undertaking, and discussed as to what exactly was the meaning of uniform.
Till November 1995, the public sector unit (PSU) had prescribed a uniform, and had thereafter discontinued it. However, it continued to pay the uniform allowance to employees and treated it as exempt. For such employees who received a uniform allowance, it had laid down a dress code from March 2010.
For men, the dress code was full or half-sleeved, well-fitted, buttoned and ironed formal shirt with formal-style trousers. There was a prohibition on loud checks, printed shirts and cargo trousers, while striped shirts were permissible.
There was a requirement that the ties should be matching with the shirts or trousers, and for belts to be sober. For footwear, formal leather shoes with socks were prescribed. For women, the dress code was ironed sarees of appropriate colours, worn neatly and appropriately, or traditional salwar kameez, or ironed western business suits or formal ladies shirts with tailored dresses or formal trousers.
The Gujarat High Court observed that these specifications certainly met the normal meaning of a dress code. However, it observed that a dress code was a minimum standard of dressing, depending on the place or occasion, and could carry a wide range of choices at the command of the person concerned, within certain parameters, which excluded a certain dressing, which was considered too informal or inappropriate for the occasion. A dress code did not specify a precise set of clothes.
According to the court, in the context of dressing, a uniform had a vastly different meaning. It would necessarily include precise instructions as to the dress, design and also colours, which will achieve uniformity in dressing at a workplace.
It noted the dictionary meaning of the term in the context of dressing as: dress of a distinctive design or fashion adopted by or prescribed for members of a particular group (as an armed service, an order or a work group) and serving as a means of identification.
Therefore, the court noted that the term ‘uniform’ in the context of dressing carried a precise meaning, and its meaning was entirely different from a far broader concept of a general dress code.
The Gujarat High Court, therefore, held that because there was no prescription for a uniform, as interpreted by it, the uniform allowance given by the employer to its employees was not exempt from tax.
This decision has far-reaching consequences for various employers, who give uniform allowance to their employees, and treat such allowance as an exempt allowance, as well as to the employees.
Many employers have been giving a liberal interpretation, and treating uniform allowance as exempt, even though only a dress code has been prescribed, and not a uniform. One has seen cases where the exemption has been granted for such allowances, even though employees are permitted to wear jeans, informal footwear, and other such attire.
Such allowance may no longer be treated as exempt, unless the uniform is of a standard colour and a standard pattern, which makes the employee group of the particular employer easily recognisable, and has been prescribed by the employer and is worn by all employees. A mere prescription of formal shirts and trousers, or dresses, even if of a particular brand, may not suffice to treat the uniform allowance as exempt.
If the allowance is taxable, and an employer has treated it as exempt, the employer is at risk of having to pay the differential tax, along with interest and possible penalty, in respect of such an allowance. Further, even the employee is at risk in her personal tax assessment, as such allowance could be treated as taxable if she is unable to show that she has spent the allowance on purchase and maintenance of a uniform.
This could result in differential tax liability with the resultant interest and penalty. Of course, the differential tax element can be recovered by the tax authorities only from either the employer or the employee, and not both.
Employers, therefore, now need to re-evaluate the liberal interpretation of the term ‘uniform’, which they have been adopting so far, and weigh the risk of the potential tax litigation and liability, which could otherwise ensue, against the additional tax burden on the employees by taking the more conservative and perhaps a more rational view.
Gautam Nayak is a chartered accountant.