The discourses related to salary structuring and restructuring are few and far between in Nepal. The willingness among the job market stakeholders to protect salaried individuals by reducing their taxable income or by limiting their tax liability by employers is something we don’t hear generally.
The private sector employees get ignored most of the time when it comes to designing employee benefits in the policy-making process. Designing balanced compensation and benefits packages that help the national economy, employer and employee carries paramount importance in a country like Nepal where the job is yet to develop fully. The daily expenses are increasing day by day, however, the annual appraisal is mostly getting ignored by the employers for whom there are several reasons to disagree with a timely salary increment schedule. At present, people are faced with problems related to the spike in inflation which is showing no sign of abating, a sharp increase in monthly expenses and stagnant income growth. Similarly, the government tends to increase the income tax rates on yearly basis to generate more revenue.
At present, most employers are practicing the cost-to-company (CTC) concept, the total salary package they offer to their employees. This concept can be beneficial to understanding the actual employee cost in the organization as employers will have a fair idea about overhead cost estimation on a real-time basis.
The tax on salary in Nepal is on the higher side. For example, let’s assume a manager gets Rs 100,000 a month. The monthly tax on his/her salary would be approximately Rs 15,000, and other statutory deductions will make the net salary comparatively lower. This will make their lives difficult as a result of the increasing cost of living and they will end up struggling for meeting daily needs. In such a situation savings for the future cannot become their priority.
In this scenario, I would like to discuss a few points that can be an option of investment for the future for the nation, at the same time it may help save some money in tax for the employees. There are two parts to it: (i) government can think of (ii) employer initiatives.
The government can think about some options in order to help and encourage the working people of the country to for their savings. By introducing tax exemption investment, the government can attract generating some funds for long-term infrastructure development.
Tax saving long-term infrastructure development fund scheme
People in employment can become partners in the nation building process as contributors to the long-term infrastructure development funds. With these funds, the government can plan for generating long-term revenue for infrastructure development. The government can come up with schemes such as tax saving investments for the general public. This can be an initiative for the general public for encouraging to develop saving habits.
Tax Benefits in Home Loan Repayment
The government can introduce tax benefits for those who have borrowed money from banks for buying their first home. With such a scheme, general people can plan to own houses and the competition for building affordable houses among builders will increase. Under this, there can be tax exemption in some part of the interest and some part of principal repayment.
House Rent Tax Benefit
In bigger cities of Nepal, most of the homes are rented for personal housing purposes. This can be a revenue generating option for the government if managed in a proper way. A significant amount of money in taxes can be collected.
Introducing tax benefits for salaried individuals who live in cities as tenants by introducing proper mechanisms of monitoring and controlling the process can support the office goers to move on with their lives.
This process can be simplified by introducing a higher limit of rent based on city or location. Making the permanent account number (PAN) mandatory for both tenants and house owners can be important to track rent transactions.
Life Insurance Premium Limits can be Increased
The limit set for tax exemption in life insurance policy premiums is very less and the amount won’t be sufficient for salaried individuals to get reasonable life insurance coverages for themselves and their family members. Even though the penetration of insurance has risen in the last few years, the percentage of people who have insurance coverages in Nepal is still low. Introducing a higher limit on tax savings can help to expand insurance coverage in the country.
Medical Insurance and General Medicines
Medical emergencies can be a very difficult situation to cope with for anyone. The Labor Act and arrangements of the Social Security Fund have some provisions to help employees of organized sectors to cover these expenses to some extent. However, this is insufficient for the medical coverage of family members of the employees including their parents or grandparents. The limits can be extended further to provide proper coverages to employees and their dependents. This can be introduced by dividing it into two parts- medical insurance premium and general medicines and tests. An annual upper limit can be set for both the options, and those amounts can be reduced from taxable income.
Vehicle Facilities for Employees
It is common for many senior executives to get vehicle facilities from organizations. How this can be a tax savings benefit for the employee is something organizations need to think of. Any benefits extended to employees are likely to attract tax liability in Nepal. However, the tax applicability in rent expenses and higher tax bracket in salary (36%) has a huge difference. This difference can be an opportunity for the tax savings alternative.
In India, the practice of a hire purchase agreement exists wherein organizations take benefit of expenses in this setup and extend the benefits to employees which reduces the cost of employees’ pay packages. Such a practice can also be introduced in Nepal to save some portion of taxes. Under this arrangement, the higher tax liability in salary can be limited to some extent and the requirement of owning a car for employees is also gets addressed.
The other alternative can be renting cars for employees from third party arrangement under which the vehicle rent is paid by employers.
Travel allowance for Employees in Domestic Tourism
Leasure trips on a timely basis sponsored by employers can a big factor for employee motivation. This may also be an alternative for increasing domestic tourism. Organizations can introduce some tour packages as a part of employee CTC packages. Under this, the expenses are borne by the employer and the taxable income is reduced from the employee.
Corporate Attire Benefits
Many employers find maintaining good corporate attire an important culture in their organizations. Some organizations have introduced dress codes for their employees. Higher the position, higher the expenses in maintaining the position in terms of the looks of the personality.
The attire expenses of employees like clothes, shoes, watches, etc. can be company expenses as a part of employee benefits. These costs can be out of taxable income and can save a significant amount from being taxed.
In today’s world full of hectic work schedules, organizing or sponsoring recreational activities is a good idea to motivate employees. Such events will spur a healthy organizational culture which will be important for growth and productivity. Initiations like movie outings on a monthly basis and dinner with family and friends can be sponsored by employers.
Many employers provide a certain amount of vehicle fuel as part of their employee CTC. But it needs to be seen whether the fule entitlement is sufficient for employees in their day-to-day commute or not. So, organizations need to further increase the fuel limit by reducing other CTC entitlements. By doing this a portion of the taxable amount can be reduced.
The benefits that employers can extend need to be structured in such a way that the audits of the company will consider these expenses under allowable expenses so that no additional tax liability will be on the organization.
At the end of the day, these expenses are for employees and for the benefit of the employees. The CTC restructuring has to be agreed upon by employees first. This may not help all levels of employees but for those who are in the 30% or 36% tax bracket.
Neeraj Neupane is an HR practitioner. He can be reached at firstname.lastname@example.org