Retirement benefit falls prey to fringe tax

Rs 100,000 cr corpus may stagnate as India Inc shies away from superannuation schemes.

A day after it was approved by the Lok Sabha, the fringe benefit tax has put a question mark on future contributions to superannuation schemes offered by companies to their employees.

Nicholas Piramal India Ltd has decided to stop contributions to the superannuation fund set up for its employees. "Instead, we will hand over the money directly to our employees every month," Nicholas Piramal CFO P Santhanam told Business Standard.

Rajan Nanda-controlled Escorts Ltd is contemplating a similar switch. "Though we have not taken a final decision, it looks like we are moving in that direction," Escorts CFO Shailendra Tandon said. A leading telecom services operator, too, said it was doing away with the superannuation scheme.

Under the new tax, all contributions made by companies towards superannuation schemes will be taxed at 30 per cent.

By giving it to the employee as a monthly allowance, companies stand to save on the tax.

The money involved is large and the savings for India Inc could be substantial. Consider this: the total superannuation funds managed by insurance companies are in the range of Rs 90,000-100,000 crore, with the Life Insurance Corporation accounting for almost Rs 20,000 crore.

"The contribution to the superannuation fund is about 15 per cent of an employee's basic salary, which is about 40 per cent of his cost to the company. So, around 6 per cent of the cost to the company is in superannuation schemes," said Anita Ramchandran, CEO of Mumbai-based HR management services firm Cerebrus Consultants.

She added that employees would not mind getting an allowance in lieu of the contribution towards a superannuation scheme as he could earn 6-7 per cent more interest by investing the money elsewhere. LIC offers a return of 8.25-8.5 per cent on superannuation funds.

If the contribution is now given to the employees as allowance, the money will not be taxed twice. With the fringe benefit tax in force, any money spent on employees' superannuation schemes will be taxed twice: first, the company will fork out a tax of 30 per cent at the time of making the contribution; and second, the employee will pay an income tax of 30 per cent on maturity.

However, some companies said they would not discontinue the superannuation schemes in spite of the new impost.

"Taxes on items like contribution to the superannuation fund of employees will be absorbed by the company," said a top ITC source.

"Superannuation is an employee welfare scheme, which we will not scrap. Our overall superannuation contribution is about Rs 4-5 crore per annum and a 30 per cent tax is not an area of concern for a company of our size," added Ravi Sood, director (finance), Hero Honda.

Sudhir Kapadia, partner, BSR & Co, the accounting arm of KPMG, expressed fears that companies that continue with the superannuation scheme will deduct the fringe benefit tax from the contribution. "At the end of 10-15 years, what the employee will get will be far less than what he would have got earlier," he said.

Insurance companies, which charge a fee for managing the superannuation funds, said they stood to lose business. "Unless a company decides to discontinue further contributions to superannuation schemes, there will not be any impact. However, getting new schemes will be difficult," R Venugopal, executive director (pension/group schemes), LIC, said.

ICICI Prudential Life Insurance's chief financial officer, Sandeep Batra, said the fringe benefit tax will have a significantly adverse impact on superannuation schemes.

Apart from contributions to superannuation funds, leading companies indicated that the fringe benefit tax would make them take a fresh look at their human resources policies.

"The tax on perks like travel will have to be passed on to employees. We will have to design a package that balances the impact on both the employer and the employees. As far as possible, we will make sure that the impact on employees is minimum," said GlaxoSmithkline Consumer Healthcare Director (HR) P Dwarakanath.

"Some amount of the burden has to be shared as we cannot take the entire burden of the increased labour cost," said Hyundai Motor India Vice-President (HR) G Ramesh, adding that the company was planning to discuss with others in the industry to ensure that there was uniformity in policies and no lrage-scale movement of personnel on account of the new tax.

Experts also feel that the fringe benefit tax will push Indian companies to adopt the western model for employee compensation by leaving all tax planning to them.

"We will see the emergence of a more mature salary structure in place of an opportunistic one," said Rahul Garg, executive director, PricewaterhouseCoopers.