Executives may jump ship to get the expected hikes
Human resource heads at BSE 500 listed companies foresee salary reviews of top earners looking to bridge the increased surcharge tax levied on individuals earning Rs 2 crore and above, reports The Economic Times.
After Budget 2019, individuals earning between Rs 2 crore and Rs 5 crore will be subject to a surcharge rate of 25 percent, up from 15 percent, which takes the effective cumulative tax rate to 39 percent (up from 35.88 percent earlier).
For those earning Rs 5 crore and above, the surcharge rate has been raised to 37 percent from 15 percent, leading to the highest effective tax rate of 42.74 percent (up from 35.88 percent).
Of the BSE 500 companies, 144 chiefs earned an average annual compensation of Rs 11.4 crore, inclusive of stock options, the report said.
The new tax structure would, for example, take off as much as 20 percent of the in-hand income for those earning Rs 10 crore, the article quoted experts as saying. It would take at least a 25 percent one-time salary hike or a staggered eight percent increase spread over three years to meet expectations, they added.
Explaining the math, the article quotes a senior India Inc CEO as saying, “Take the example of someone earning Rs 10 crore as salary with, say, 25 percent of it comprising employee stock options or ESOPs. Currently, about 35 percent will go towards tax, about 30 percent will be future cash flow, and what remains will be about 35 percent. Under the new scenario, what will remain is about 28 percent. This means the individual will lose 20 percent of take-home pay.”
Executives may now be forced to jump ship to get the expected raise. However, companies choosing to compensate employees for this loss may also have other problems to contend with as the move may further skew the pay gap between workers and top management, which the article pegs on an average 243 times higher. Prabir Jha, founder of Prabir Jha People Advisory, told the newspaper that if top salaries get buffered for the higher tax rates, the gap will widen.
There is also discontent over a small percentage of high earners paying more taxes to off-set a large majority of the country, which does not come under any tax bracket.“When 98 percent of the country does not pay any tax on their income, is 36 percent tax paid on their income by these 10,000 not high enough? Why should they have to pay 43 percent now? This is the fifth time the tax rate is being increased for this minority group in six years,” the report quotes a CEO as saying.Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.