Are all VRS a "retirement payment"? And some other interesting decisions.

Sushil Parajuli

A Voluntary Retirement Scheme (VRS), also known as a Voluntary Separation Scheme (VSS) or Early Retirement Scheme (ERS), is an employee-friendly initiative offered by organizations, typically in the corporate or government sectors. The primary objective of a VRS is to reduce the workforce through voluntary means, often with the aim of achieving cost savings, optimizing organizational structure, or managing changes in business priorities.

Section 2(nga) of the Income Tax Act, 2058 provides the definition of retirement payment as follows:
दफा २(ङ) अवकाश भुक्तानी: “अवकाश भुक्तानी” भन्नाले देहायका व्यक्तिलाई दिइने भुक्तानी सम्झनु पर्छः
(१) प्राकृतिक व्यक्तिले अवकाश लिएको अवस्थामा निजलाई दिइने भुक्तानी, वा
(२) प्राकृतिक व्यक्तिको मृत्यु भएको अवस्थामा निजको आश्रितलाई दिइने भुक्तानी ।

Sushil Parajuli

Sushil Parajuli दफा २(ङ) अवकाश भुक्तानी: “अवकाश भुक्तानी” भन्नाले देहायका व्यक्तिलाई दिइने भुक्तानी सम्झनु पर्छः
(१) प्राकृतिक व्यक्तिले अवकाश लिएको अवस्थामा निजलाई दिइने भुक्तानी, वा
(२) प्राकृतिक व्यक्तिको मृत्यु भएको अवस्थामा निजको आश्रितलाई दिइने भुक्तानी ।

An important question - Does the payments made under the VRS Schemes come under the definition of "retirement payment"? Looking at the definition of the "retirement payment" offered in the Income Tax Act - it certainly seems so - but we will discuss this in more detail referring the case of महेन्द्र राज पाण्डे बिरुद्ध ने.रा.बैंकको संचालक समिति समेत below.

Here are some explanations offered in Income Tax Directive: Link 1, Link 2

Sushil Parajuli

Sushil Parajuli महेन्द्र राज पाण्डे बिरुद्ध ने.रा.बैंकको संचालक समिति समेत

Before discussing the case of महेन्द्र राज पाण्डे बिरुद्ध ने.रा.बैंकको संचालक समिति समेत Case Number: 2677 Decision Date: 2064.08.16 - we should delineate how the amounts under VRS Schemes are defined.

Normally in Nepal the employees are offered as a minimum starting negotiation point - an amount of employer's social security contribution (gratuity, provident fund etc.) for the remaining service period of each employee (had they continued the employment) but not exceeding the agreed maximum number of years. This is not a rule but is followed mostly in practice given the trends. Any amount that is agreed above that maybe negotiated and agreed upon. These could include:

A payment proportional to each year of past service
Medical allowance payment depending on the age of the employees
Enhanced pension plan, if employees are eligible to receive pension etc.

However, there is no defined way on how a VRS amount is negotiated. The negotiation process for a VRS amount can vary depending on the organization's policies, practices, and the legal and regulatory framework of the country. VRS negotiation involves the organization designing the offer with eligibility criteria, incentives, and terms. Consultation with representatives may occur, and eligible employees apply. The organization evaluates applications, potentially entering a negotiation phase, where employees discuss aspects like lump-sum payment and timing. Individual circumstances, such as position and tenure, are considered. Terms are finalized, participants accept, and the organization processes payments. This process varies based on policies, labor laws, and organizational context.

Sushil Parajuli

The the case of महेन्द्र राज पाण्डे बिरुद्ध ने.रा.बैंकको संचालक समिति समेत Case Number: 2677 Decision Date: 2064.08.16 - is quite unique and very likely to be misinterpreted. There is also an additional judicial advice offered by Justice Balaram KC offered in the decision in relation of taxation of pension income.

Let's look at the facts of the case carefully:
In this case - the employees of the NRB opted for voluntary retirement and received a lump sum amount equal to pension of 10 years as per the entity bylaws. NRB withheld a 15% tax in such payment under Section 88(1) of Income Tax Act 2058. The employees pleaded before the court that the pension amount received in advance should not be taxed on lumpsum basis, rather it should be taxable on annual basis as per Section 3 of the Income Tax Act. NRB and Revenue Authorities argued that the since the amount have been received in lumpsum, the receipt and taxation of the amount should coincide and should be taxed on cash as per Section 22 of the Income Tax Act, 2058.

Though the amount stipulated under the VRS scheme seemingly fits with the definition of a "retirement payment" under Income Tax Act 2058, the court's ruling diverged from that view. The court clarified that the current matter, entailing the lump-sum release of a prospective ten-year pension, lay beyond the scope of the Income Tax Act, 2058 and offered a more liberal and just view on its taxation. When tax laws are absent, silent, or ambiguous, an interpretive bias in favor of taxpayers should be exercised. Income tax of each year's pension should be calculated as per the rates prevalent for each year. The court decided that the government cannot be nourished at the expense of amount withheld from the applicants and thus the act of withholding flat 15% taxes by NRB and Revenue Department is quashed by certiorari.

Sushil Parajuli

Sushil Parajuli There is also an additional judicial advice offered by Justice Balaram KC offered in the decision in relation of taxation of pension income.

The Supreme Court's passing also encompassed a recommendation to the Government concerning pension taxation. While the Court refrains from challenging the legality of pension taxation as outlined in the Income Tax Act 2058, acknowledging its alignment with constitutional provisions, it suggests a reevaluation of taxing pensions for individuals in public positions and employees.

Pensions, a compensatory measure for prolonged service, align with the Constitution's focus on safeguarding and providing social security for the elderly. Despite designations as senior citizens, retired employees are elderly individuals. Except for the limited old age allowance under section 35(17) of the Senior Citizen Act 2064, there exists no legal framework for incentivizing elderly citizens financially. Retirees' pensions reflect compensation for devoted years adhering to conduct codes within an organization, rather than being a gratuitous provision. Characterizing pension as income is incongruent with its intent for supporting livelihood during old age, particularly within a nation lacking an established social security safety net. The question of whether taxing pension by deeming it as income aligns with justice is raised, warranting the Finance Minister's attention.

Sushil Parajuli

Let's discuss another case of of ज्ञानबहादुर चौधरी वि. कृषि सामग्री कम्पनी लि. समेत (Page 18/30) Case Number: 066-WO-0333 Decision Date: 2068.01.02

The summary of the decision is as follows:
मा.न्या. श्री कल्याण श्रेष्ठ र मा.न्या. श्री सुशीला कार्की, २०६६ सालको WO-०३३३, उत्प्रेषणयुक्त परमादेश, ज्ञानबहादुर चौधरी वि. कृषि सामग्री कम्पनी लि. समेत
निवेदकले स्वेच्छिक अवकाश लिएबापत कम्पनीले उपलब्ध गराएको थप वा अतिरिक्त सहुलियत अवकाश प्राप्त गर्ने कर्मचारीले कुनै कानूनको व्यवस्थाबमोजिम वा कम्पनीको विनियमावलीमा साविकदेखि उल्लेख भएको कारणले पाउने अवस्था नभएकोले यो अवकाश कोष वा सञ्चय कोषमा राखिने अधिकारस्वरूप दावी गर्न सकिने प्रकृतिको रकम हो भनी मान्न मिलेन । यस अवस्थामा कम्पनीले आफ्ना कर्मचारीलाई थप सुविधास्वरूप अवकाश प्राप्त जीवनको आर्थिक सुरक्षण हुने उद्देश्यले उपलब्ध गराएको रकममा आयकर ऐन, २०५८ को दफा ८८(१) बमोजिम उक्त सहुलियत रकममा मात्र १५ प्रतिशत कर कट्टी हुने गरी भएको निर्णय वेरीतपूर्वकको मान्न नमिल्ने । इजलास अधिकृतः बिमल पौडेल इति संवत् २०६८ साल बैशाख २ गते रोज ६ शुभम् ।

And another case of चतुर्भुज भट्ट वि. कृषि सामाग्री कम्पनी लिमिटेड समेत Case Number: 069-WF-0008 Decision Date: 2070.01.12
The summary of the decision is as follows:
सामान्यतः आय गरिन्छ भने त्यसमा कानूनबमोजिम कर लाग्दछ भन्ने कुराको अनुमान गरिनु पर्दछ । त्यसमा पनि कर लाग्ने र नलाग्ने भन्ने कुरामा कानूनमा भएका दुई व्यवस्थाबीच असमाञ्जस्यता देखिन्छ भने अन्यथा प्रमाणित नभएसम्म कर लाग्दछ भन्ने व्यवस्थाको पक्षमा अनुमान गर्नुपर्ने (प्रकरण नं.१०)
अवकाश भुक्तानीबापत दिइएको अतिरिक्त सहुलियत रकममा पन्ध्र प्रतिशत वा पाँच प्रतिशतमध्ये के कति कर लाग्ने हो भन्ने सम्बन्धमा द्विविधा भएको भए सोही प्रक्रियाबमोजिम स्पष्ट हुन सकिनेमा कर प्रशासन गर्ने कर कार्यालयलाई विपक्षी नै नबनाई सिधै रिट क्षेत्रमा प्रवेश गरेको समेत कानूनसम्मत देखिँदैन । (प्रकरण नं.१३)

Sushil Parajuli

Sushil Parajuli Let's discuss another case of of ज्ञानबहादुर चौधरी वि. कृषि सामग्री कम्पनी लि. समेत (Page 18/30) Case Number: 066-WO-0333 Decision Date: 2068.01.02

Sushil Parajuli And another case of चतुर्भुज भट्ट वि. कृषि सामाग्री कम्पनी लिमिटेड समेत Case Number: 069-WF-0008 Decision Date: 2070.01.12

In the matter of चतुर्भुज भट्ट वि. कृषि सामाग्री कम्पनी लिमिटेड समेत, the employees were extended an initial point of negotiation amount for VRS Scheme, comprising the employer's gratuity contribution for their remaining service tenure. but not exceeding the agreed-upon maximum of 5 years, as delineated by the VRS Policy. Furthermore, as an enhancement to the attractiveness of the VRS Scheme, employees were presented with an additional fixed payment, proportionate to their cumulative years of prior service – denoted as the "additional amount."

The court, in both instances, elucidated that the "additional amount" is liable to a taxation rate of 15%, as per Section 88(1), rather than the 5% tax stipulated by Section 88(1) Proviso 1. The court expounded that the 5% withholding specified in Section 88(1) Proviso 1 for gains computed in accordance with Section 65(1) does not apply in cases where the retirement payment does not emanate from a retirement fund (the VRS Policy in this case) – irrespective of whether it is the government that administers the retirement payment or otherwise.