The Hindu Business Line : Bones to pick with the bonus law

THE Payment of Bonus Act, 1965 is as antiquated a piece of legislation as the Indian Telegraph Act, which is of 1885 vintage. Yet, it requires as much overhaul as the telegraph law. An employee is required to be paid a minimum bonus of Rs 100 or 8.33 per cent of his salary per year, whichever is greater. Rs 100 might have been a princely sum when the statute was enacted. But the inexorable speed with which the rupee's purchasing power has been eroded over the years, makes the continued reference to this figure as a benchmark a mockery. No employee should be insulted with a bonus of Rs 100, especially given the fact that payment of bonus in this country normally coincides with the joyous festival of Diwali, the festival of lights.

In all fairness, this minimum should be revised upwards to Rs 1,000.

Equally ludicrous is the cut-off limit of Rs 3,500 per month to make the grade as an eligible employee. The Act does not discriminate between employees doing clerical and managerial work as well as between blue-collar and white-collar work and rightly so. But the cut-off point of Rs 3,500 virtually shuts out the white-collared staff and not infrequently many of the blue-collared ones as well.

The Act should take a cue from the Payment of Gratuity Act, which applies to all employees irrespective of the work they do and the salary they draw but limits an employer's gratuity liability to Rs 3,50,000. At present, the bonus eligibility is subject to two limitations.

Only employees whose salary does not exceed Rs 3,500 per month are allowed to claim a share in the bonus pie. Moreover, the qualifying employees do not get bonus on the full salary. Salary for the purposes of bonus is limited to Rs 2,500 per month. What this boils down to is this. At the minimum rate of 8.33 per cent, the maximum bonus one can get is Rs 2,500 and at the maximum rate of 20 per cent, the maximum bonus is Rs 6,000. Those whose salary is more than Rs 3,500 a month get no bonus at all unless the employer condescends to pay them any bonus at all at his discretion. That many employers do so is another matter.

What rankles many employees is the absence of statutory protection the moment their salary exceeds Rs 3,500 per month. This limit should go. And the cap on bonus should be liberally hiked from Rs 6,000 to Rs 12,000 in keeping with the times. Ideally, this cap should be linked to an indexing formula a la the one obtaining for computing the cost of long-term capital assets under the income-tax law. But it should not be done away with because assuming the suggestion to allow all employees to share the bonus pie is accepted, the no-holds-barred access to bonus would place high paid employees at a premium vis-à-vis their low-paid brethren.

For calculating profit for the purposes of bonus, depreciation is required to be provided at the same amount as under Section 32 of the Income-Tax Act.

It is common knowledge that the tax rate of depreciation has been kept artificially high to attract investments. In the event, employees' claim to bonus should not be undermined by such artificiality. The Finance Bill, 2005 seeks to reduce the depreciation rates across the board. This will incidentally correct the skew against the employees countenanced by the bonus law for so long.

There is an inbuilt inequity against the shareholders in the formula for dividing the profit sweepstakes between the employees and the shareholders. Sixty-seven per cent of the available surplus is distributable as bonus. In calculating the available bonus, while preference dividend should be provided for in its entirety, with which provision nobody can possibly have any quarrel, only 8.5 per cent of the equity share capital plus 6 per cent of the reserves need to be provided as reward to the shareholders. While it is true that investors in equity are risk-takers that is not reason enough to fob them off with a pittance. The Bonus Act does not indeed mandate any minimum dividend to shareholders. But by earmarking such a low reward to them, what could happen is their interests may suffer. And there is no reason why the law must discriminate between one class of shareholders' funds and another. It is therefore suggested that the third schedule to the Bonus Act should be amended to mandate a provision of 15 per cent on the shareholders' funds. Needless to say, artificially created reserves, such as revaluation reserve, should not figure in the computation.

If this is done, the cap on maximum bonus, which is 20 per cent, can go. Indeed there would be no place for it when the profit pie has been equitably divided amongst all the stakeholders. If the allocable surplus warrants a bonus distribution of 30 per cent or even 50 per cent of the salary, so be it. Why should anyone stand in the way of the employees savouring their reward here and now? At present, the law expects the employer to carry forward up to a maximum of 20 per cent of their salary to be paid as bonus in the next four years should the allocable surplus of these years fall short in paying a bonus in excess of 8.33 per cent.

The Government obviously has the rainy-day argument in its mind when it mandates this. But this is against the spirit of bonus. The late entrants this way would be entitled to partake of the rewards of labour of the existing employees to the latter's detriment. Having spelt out the allocable surplus, the Government should avoid micro-management, which dictating what the maximum bonus should be amounts to.

(The author is a Delhi-based chartered accountant.)

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