Question

Question B5

Lancy had been employed by IBM Ltd (IBM), a US company which carries on business in Hong Kong. Due to Lancy’s father being very ill, she needed to fly to Canada in the following week to take care of him. On 30 November 2019, Lancy submitted her resignation to IBM and terminated her employment with immediate effect by foregoing one-month’s salary in lieu of notice.

As it was possible Lancy might need to stay in Canada for a few months, she requested that IBM remit any outstanding payment owed to her (including her leave pay and payment from IBM’s provident fund, and after deducting the one-month’s salary in lieu of notice) to her bank account in Canada.

Required:

You are financial planner of the CEO of IBM. You are required to advice IBM the potential obligations on tax in respect of Lancy’s resignation.

End of Section B

(Total 9 marks)

Answer 1

Resignation and Tax implication

most of the time employment agreements that have a clause if an employees wishes to leave the company before serving the stipulated notice period th eperson have to pay the amount equivalent to the unsecured notice period.

This notice pay is deducted / recovered from the salary payable to such employees. under the tax law any payment received by the employee for past present and future from the employer is taxable as salary and it is taxable on due bases.

So, the regular salary received by the employees get taxed on due bases (when it is paid every month). on the other hand, the recovery of the notice period happen only after the employee leaves the jobs. by that time the entire salary is already taxed by the employer on due bases.

As per the contract notice must be given in advance before leaving so that employer can make aggangement the person in lieu of the person who leave.

There is no exclusion or assumption to the service provided by the employer to employee .This is also not covered in the exclusion limb of the service defination.

Companies collect money from the resiging employees for tolerating early termination from the employement without servicing notice period and such receipt could be liable to service tax in the hands of the company and service tax could   be demanded .

At the same time it should not be lost sight that under negative list based taxation , the service tax levy is an activity tax . The procedure for full and final settlement is often simple and as per appointement contract all the rules must be followed regarding unpaid salary , unpaid bonus, payment for non-availed leave,

-Gratuity if four year and two forty days have been completed .

-Pantion as long as employe has completed atleast six month of service with the existing employeer and ten year of pasionable service.

So, these are the tax impact also considered in case of resignation without notice and company must follow all the rules and regulations to avoid any legal action.