Finance Minister Arun Jaitley has indicated that India needs a lower tax regime and higher compliances to provide more competitive services. A vital issue pointed out by him is that the authorities need to be fair in interpreting provisions and there should be no grey area in such laws.
Exorbitant and globally incompetent tax rates and liabilities, ambiguous provisions and cumbersome compliance systems weaken Indian corporates against foreign rivals. There’s an urgent need for reforms, clarity in provisions and well-organised transparent procedures with adequate checks on statutory authorities.
For instance, under the Indian Provident Fund (PF) Laws, 12 per cent of an employee’s basic salary and other defined components gets deposited in the PF account along with an equivalent 12 per cent contribution by the employer each month. According to this law, once an employee enrolls as a member of the PF, he mandatorily remains a member throughout his service period with the company. One ceases to be a member only upon quitting the organisation and withdrawing PF. Such provisions, which warrant employees with higher pay packages also to part with 12 per cent salary each month as well as force employers to contribute, is alien to the whole idea for which social security schemes were drafted, and needs to be mended.
Absolute clarity is also required from the legislature regarding salary components on which PF and Employees State Insurance benefits are to be computed. Unclear provisions create latitude for authorities to misinterpret, leading to extortionist demands. One solution is to lay down an amount on which the statutory benefits will be computed, rather than having it components-based. This will curtail the scope for Inspector Raj and subterfuge salary structures. The PF scheme does mention that contribution beyond Rs 15,000 is a choice, but owing to lack of clarity on other provisions, this is many a time bypassed.
Another modification which will aid curtail liability without creating negative impact on the financials is with respect to the Bonus Act. In 2015, the eligibility limit of salary requisite for coverage under the Act and the amount on which bonus is computed was enhanced. Additional bonus liabilities virtually lead to reduction in incentive schemes or adjustment in some variable component of salary, due to financial constraints. Currently, the only exclusion available under the Act is the existence of a settlement for production/productivity-linked bonus between the employees and industry as mandated under the Industrial Disputes Act, compliance provisions of which are archaic.
Excessive and complex liabilities lead to higher evasions and compel financial experts to resort to adjustments in areas like employee’s CTC. This reduces the take-home salary to a fraction of the total compensation.
Another area which needs review is the cess levied under the Building and Other Construction Workers Act. Current provisions entail deposition of cess on complete cost of construction, excluding only the land cost and compensation under the Employees Compensation Act. There is no justification for costs of components such as consultancy, engineer, architectural, approval and supervision, insurance and finance, interest, profits, contingencies, etc. Lawmakers need to clarify the same to create uniform provisions throughout the country rather than state authorities and courts giving different interpretations.
Some of our compliances are a boon only for the coffers of statutory authorities.
Raavi Birbal
Advocate, Supreme Court of India
raavibirbal@gmail.com