Employees of many leading corporate houses got a bonus earlier this month when they saw a hike of 15 per cent in their salaries.
An early increment in the beginning of the financial year? A bonus perhaps as corporate India posted an average growth of 47 per cent in net profit in 2004-05?
Neither. Many corporate houses rather have decided not to invest further towards their respective superannuation accounts. Instead they would rather pay the sum in cash to their employees.
With the government announcing a 30 per cent fringe benefit tax on superannuation funds, corporate India is hardly gung-ho on setting up special employee schemes if it means adding to costs rather than getting a tax break! Contributions to superannuation funds gave corporates a tax break. Today any contributions imply a cost for corporate entities under FBT.
As the situation stands reversed, employees' free medical and free life insurance cover as well as future pension for employees are likely to go for a toss. Corporate India has virtually stopped buying group insurance schemes for employee benefits.
"Fringe benefit tax has disturbed the market. Many corporate have deferred their decisions," says Nani Jhaveri, CEO Birla Sun Life. The company estimates its own business to the tune of Rs 80-100 crore (Rs 800 million-1 billion) has been affected by the government's decision to tax employee benefits!
Companies contribute about 15 per cent of employees' cost to the company (CTC) to superannuation schemes. This is now likely to be paid on a monthly basis directly to employees instead.
So while employees can look forward to a handsome hike in their salaries, in the long run unless they save well, they cannot expect a pension post retirement.
What's worse, should employers continue with their respective superannuation schemes, the same would be taxed twice: once on contribution and then again at the time of annuity, when a monthly pay-out is made to retired employees from the fund.
Sale of group plans by insurance companies in March and April have declined. Fierce competition is putting pressure on organisations to reduce costs and remunerate employees in a tax efficient manner, points out Nikhil Bhatia, partner, BSR & Co, KPMG.
So what does it mean for employees today? A fatter salary package if superannuation is part of one's CTC. More money to buy that CD player one wanted. But if one were to look at the situation realistically -- employees would end up paying a higher tax!
After all higher salaries have always meant higher outgo in taxes. So the employees ends up a loser on two fronts.
On the one hand, he can no longer hope for a pension from the company at the time of retirement. Moreover, while he may get a fatter monthly package, he would end up paying tax on the same. Earlier this component of his CTC was tax-free.
What could be worse for the society is the fact that with most individuals not really saving for their old age, we could see a scenario wherein individuals may not have sufficient funds to live on post retirement.
A dead end
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