Assume a manufacturing firm has wages bill of ₹ 3 crore per month. On account of liquidity problems, it could not pay its workers for one months (say, March 2020). How much should be the wages expenses for AY 2019–20 and AY 2020–21 and why?
Answers
Answer:
The wages bill of ₹3 crore per month for a manufacturing firm means that the firm incurs a total annual wage expense of ₹36 crores (3 crore per month x 12 months). If the firm could not pay its workers for one month (March 2020), it means that the total wage expense for the year would be ₹33 crores (₹36 crores - ₹3 crores).
Regarding the impact on the wages expenses for AY 2019-20 and AY 2020-21:
AY 2019-20: The wages expense for AY 2019-20 would be based on the actual payments made to workers during the relevant financial year, which in this case is April 2019 to March 2020. Assuming that the firm made all wage payments during this period, the wages expense for AY 2019-20 would be ₹36 crores.
AY 2020-21: The wages expense for AY 2020-21 would be based on the actual payments made to workers during the relevant financial year, which in this case is April 2020 to March 2021. Since the firm did not pay its workers for one month during this period (March 2020), the wages expense for AY 2020-21 would be ₹33 crores.
The reason for this is that the tax liability for a financial year is based on the actual payments made during that year. Therefore, the wages expense for AY 2019-20 would be based on the payments made during that year, regardless of whether or not the firm faces liquidity problems in the subsequent year. Similarly, the wages expense for AY 2020-21 would be based on the actual payments made during that year, which would be lower due to the non-payment of wages in March 2020.