R Srinivasan

Honey, I shrunk the payroll

| Updated on September 30, 2020 Published on September 30, 2020

The Covid-19 pandemic has permanently changed the way employers look at employees

From using the ‘Act of God’ gambit to get out of compensating States on their GST dues to extending the last date for filing both direct and indirect taxes multiple times (the latest extension now stretches to November for Income Tax), the embattled Finance Minister has left no stone unturned to garner funds for the exchequer.

While indirect tax collections may yet pick up from next year (2020-21 is increasingly looking a write-off on the revenue front, for both India Inc and the government) if the predicted sharp recovery pans out, the Covid-19 pandemic, and the extreme stress that it has put the economy under, may have permanently changed things on the direct taxes front.

The two main sources of direct taxes for the Centre are corporate tax and income tax. India has reduced its average corporate tax rate for small companies, large companies with fresh investments and overseas investors. According to Finance Ministry data, the top marginal corporate tax rate (adjusted for things like cesses, etc.), which ruled at a high 34.61 per cent between 2015 and 2018, has plunged to 25.17 per cent over the past two years. So even if the economy had been growing, the taxman would have been collecting a smaller slice of the pie. And as we all know, the economy is tanking spectacularly, with projected full-year contraction slated to be anything between 12-15 per cent.

The pinch

On the personal income tax front, while the tax rate itself hasn’t actually changed, the tweak to the slabs has meant that the tax rate has reduced for those earning taxable income ₹15 lakh per year. This will actually make a dent in the tax collections, because, out of India’s 2.9 crore salaried taxpayers, 81.5 lakh earned a taxable salary between ₹5-9.5 lakh, while another 22 lakh taxpayers fell in the ₹10-15 lakh bracket, which means more than a third will already be paying less tax, to begin with.

Now comes the twist. The severe series of lockdowns — amongst the most stringent in the world (India topped the world in the ‘Stringency Index’ developed by Oxford University) — has wreaked massive destruction on India’s workforce. Much has been written about the plight of millions of migrant workers, who had to trudge hundreds of kilometres home on foot after being suddenly deprived of their livelihoods, but the carnage among India’s white-collar workforce has been equally severe.

Millions of jobs — middle-class jobs enabling the middle-class lifestyles of millions of Indian city dwellers — have been lost as the economy struggles with its most severe recession in history. According to data from CMIE’s Consumer Pyramids Household Survey, the number of ‘White-collar professional employees and other employees’ — this category covers almost all of India’s knowledge workers including engineers, doctors, accountants, teachers and the like — plummeted from a May-August 2019 peak of 18.8 million to a May-August 2020 low of 12.2 million. This means that over 65 lakh good quality, paying jobs — jobs of the kind that help the government collect taxes and help sustain everything from apparel and automobile sales to real estate and mutual funds — have been devastated by the pandemic.

What’s more, employment among industrial workers — factory workers if you like — fell by 50 lakh during the same period. So that’s a crore plus jobs (and taxpayers) right there.

Add to this the ongoing erosion in employment among the so-called ‘white-collar clerical workers’ — CMIE classifies people like office secretaries/clerks/data entry/BPO/KPO entry-level workers in this — caused by technology and automation. Although this category of jobs did not fall during the lockdown significantly, overall numbers have declined from about 15 million in 2018 to less than 12 million by 2020. When you lose more than a crore potential taxpayers, you are definitely going to be collecting less.

Of course, one could argue that these are estimates based on surveys — and surveys can be notoriously off the mark, as multiple poll surveys have shown in the past. But there is now some empirical data to back up these estimates. And the news, if you are a tax officer looking at stiff targets, is not good.

Peoplestrong, a leading provider of payroll solutions to India Inc, analysed the payroll data it handles for the May-July period. Now this is based on actual payslips generated for more than half a million employees spread across hundreds of companies over these two months. Across India’s most active sectors — from manufacturing to retail to aviation to FMCG to quick-service restaurants and other services — there has been a very significant reduction in both salaries and headcounts. In other words, the job losses are real. And even those who were lucky enough to hang on to their jobs (the CMIE data looks only at job losses, remember) have paid a high price in terms of pay cuts.

Vanishing workers, salaries

According to Peoplestrong’s analysis, the average payroll size has reduced by 26 per cent across most industries. In some sectors, the devastation has been massive. The payroll reduction has been 49.72 per cent in retail, 37.46 per cent in the energy vertical and over 27 per cent in aviation, for instance. Which means the total salary paid out by an employer has reduced by anywhere from a fifth to half. So the tax collection will shrink accordingly.

A big factor behind this reduction, of course, is the reduction in headcounts. In categories like restaurants, which were shut for over five months because of the lockdown, 51.87 per cent of employees were laid off. Retail saw a 24.19 per cent sacking, while infrastructure and financial services saw a 16.30 per cent and 15.41 per cent reduction in headcount respectively.

More importantly, there have been other changes in the way salaries and wages are structured, which are going to be of a more permanent nature. According to Sandeep Chaudhary, President of Peoplestrong, “many of these changes, particularly in pay structure, are going to be permanent.”

The biggest shift is from a straightforward pay system to one more weighted towards variable pay, which is contingent on both individual and organisational performance. At the CXO/top management levels, variable pay post-Covid has surged to 35 per cent to 50 per cent of total pay, compared to 25-40 per cent pre-Covid.

At middle levels, it is now 15-25 per cent, while even at junior levels, where there was often no variable pay earlier, a minimum 10-15 per cent variable component is seen. In fact, Deloitte estimates an 85:15 split between fixed-variable will become pretty much standard, across jobs and verticals, jumping to as much as 50-75 per cent at the CEO level.

With the economy shrinking and most companies failing to meet even frantically revised targets, any number of deadline extensions won’t be enough to achieve the budgeted revenue targets as far as the government is concerned.

The writer is a former editor of BusinessLine

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Published on September 30, 2020
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