The Covid-19 pandemic has turned the world upside down, impacted global economies significantly and changed everyone’s lifestyle as well. The Indian economy is no exception, with a 23.9% shrinkage in the second quarter of the year. However, with the easing of lockdown by various states and gradual resumption of activities, the focus is on revival of the economy. How does this happen? First and foremost, demand has to be stimulated so that there are buyers for produce.
In a bid to increase consumer spending that can lead to demand for goods and give the much-needed impetus to the economy, the Union Finance Minister announced two measures on 12 October, 2020. While both these intend to pump more cash into the hands of customers, they are designed in such a way that customers spend the money so as to stimulate demand.
The first measure relates to provision of cash equivalents of leave encashment and leave travel concession. This has been introduced due to the challenges faced by individuals in undertaking travel (triggered by the pandemic and the resultant restrictions) and claiming leave travel concession. As per the same, an employee will be eligible for cash equivalent at notified rates that are based on their grades and entitlement. They will also be eligible to claim full value of leave encashment.
One may wonder how this will help in generating demand for products and giving a boost to the economy. This comes through the rider as per which an employee has to spend a sum equal to the amount of leave encashment and three times the eligible leave travel concession, to avail the full benefit. In other instances, the benefit will be prorated based on the expenditure incurred by the employee. Further, such spending has to be on goods that attract GST of not less than 12% and through digital mode. Some examples of goods that have a rate in excess of 12% are air conditioners, dish washing machines, television, set-top boxes, motor cars, motor cycles, cement, caffeinated beverages, pneumatic tyres etc. By perusing the list, one can understand that these are not essential commodities like food products, clothing or hygiene related. Nevertheless, some of these goods have become integral to the life of the common man and hence it would not be an exaggeration to state that they are necessities of life and not luxuries.
The government has based this rider on a study finding that has reported increase in savings by sections of Central Government and public sector employees and hence wants to promote spending through the cash impetus. It is also important to note that employees have to avail both leave encashment and leave travel concession to be covered by this package and one cannot be taken in isolation.
Moving on to the tax aspects – does one get a tax exemption for the cash received subject to meeting the conditions relating to expenditure? The answer to this will be a yes and a no. Yes in case of cash equivalent of leave travel concession as this is in lieu of actual travel. On the other hand, amount paid towards leave travel encashment is taxable and employers will have to factor the same as part of the payroll process for tax withholding.
The next thought that one can get is on the applicability. The office memorandum provides the specifics for Central Government employees. However, one can infer from the Finance Minister’s speech and the clarifications provided during the press conference that state government and private sector employees are also eligible for the package subject to meeting the conditions laid down. Hence, one would have to see whether the private sector responds in an affirmative manner to this announcement and extends the benefit to its employees.
The second measure announced by the Finance Minister relating to customer spending is provision of festival advance up to Rs 10,000. This is specific to Central Government and public sector employees and hence unless a similar measure is provided by private sector establishments, this section of employees could lose out on the benefit.
It is clear that both the measures are aimed at a quick revival of the economy given the timeline of 31 March 2021, by when employees must spend the amount specified. By design, these could also result in a win-win situation for both the individual as well as the industry. However, whether the expectation translates to reality is something one would have to wait and watch as time unfolds. Also, we would have to wait and see if tax authorities specifically clarify that the leave travel concession is available to private sector as proposed by the Hon’ble Finance minister in her presentation on 12 October.
(By Sudhakar Sethuraman, Partner, Deloitte India, and Radhika Viswanathan, Director with Deloitte Haskins and Sells LLP)