The Hindu Business Line : A clinical look at medical benefit

WHY should an employer not adopt a system of medical allowance which is easy to account and administer instead of the more cumbersome system of giving medical reimbursements?

Mohit Chowbey, Allahabad

You are right when you say that allowances are easy to administer. They are simply added to the monthly salary and, therefore, do not call for elaborate record keeping and control entailing time and labour. An allowance once fixed for various grades becomes standardised and is thus amenable to computerisation.

Reimbursement, on the other hand, calls for scrutiny of the bills produced by employees to see if it conforms to the company rules. In a regime of allowance, generally the employer is not concerned with the end use thereof. But the income-tax law gives generous exemption to medical reimbursement even while subjecting medical allowance to complete tax liability.

Perhaps, the idea is to discourage through the tax carrot diversion of what is intended for medical purposes to other uses by calling upon the employer to keep an eagle eye on the end use. But then it is simply not possible in this world to control everything — employees buy toiletry and other items camouflaged by medical bills and neither the tax authorities nor the employers can do anything about it.

Bonus vs stock split

WHAT is the difference between bonus issue and share split?

Mallika Sarangan, Chennai

They look deceptively similar but differ considerably in effect. When shares are split, the paid-up share capital of the company does not change because while the number of shares have increased there is a matching reduction in their par value resulting in the paid-up capital staying put. To wit, if the share capital of a company was Rs 100 crore rupees comprising 10 crore shares of Rs 10 each, post-split into par value of Re 1 each, the paid-up capital would remain same because now there are 100 crore shares but their par value is only Re 1.

On bonus issue, however, there would be an increase in the paid-up share capital with a corresponding diminution in the reserves and surplus. In the US, bonus issues are shrugged off as a sort of stock split on the ground that effectively the shareholders' wealth in the books remains the same. But if a bonus issue is born of an optimistic view of the future, it does help the shareholders in maximising their wealth in the market.

In India, therefore, investors do not give thumbs down to bonus issues as a matter of course.

VRS relief

IS RELIEF under Section 89 on for VRS compensation?

K. Anand, Bangalore

Rule 21A (1)(c), made pursuant to Section 89, says that where the payment is in nature of compensation received from employer or former employer in connection with termination of employment after continuous service for not less than three years and where the unexpired portion of his term of employment is also not less than three years, then the relief would be granted in accordance with Rule 21A(4).

No employer gives VRS to employees who have not put in ten years of service. Therefore, on this touchstone, everyone getting VRS will make the grade for relief under Section 89. No employer normally would extend VRS to employees who have a residuary term of less than three years. Therefore, on this touchstone too, they would make the grade.

Education cess

IS EDUCATION cess applicable on salary and rent also? If yes, it is retrospective?

K. Anand, Bangalore

Yes, the education cess is payable for the year 2004-2005 on taxes of all hues, both direct and indirect. Salary and rent are taxed under the income-tax law. And, therefore, the incidence of education cess will also fall on them. Education cess is not retrospective. The Finance Act 2004 contemplates it only for the year 2004-2005.

Recycling funds

CAN you enlighten me on what exactly is securitisation of assets?

K. S. Arumugam, Cuddalore

Securitisation helps a finance company to recycle its funds better. To use a cliché, it unlocks the funds lying blocked in long-term loans. A housing finance company might have given Rs 100 crore of housing loans repayable over a period of 15 years. An option before the housing finance company is not to wait for repayments to flow in trickles every month but to go for lumpsum encashment of the outstanding loans or part of them.

This it can do by assigning the loans lock, stock and barrel to a special purpose vehicle (SPV) which pays off the housing finance company by issuing bonds to high net worth individuals and qualified institutional investors on the strength of the mortgage bequeathed to it by the housing finance company.

The bonds obviously would carry a coupon rate that would be lower than the rate of interest on the housing loan so as to give a decent spread to the SPV. With the proceeds of the bonds, the housing finance company would be paid off. The housing finance company thus is in possession of liquid assets which can be used to give fresh loans.

Refund lag

IF TAX is deducted at source and deposited with the government where none was deductible in hindsight, can one claim refund of the same forthwith?

Anand Kumar, Bangalore

This contingency has not been anticipated by the lawmakers. In the event therefore the victim has to wait for refund, if any, from the department at the time of assessment.

At any rate he can pro tanto reduce the next instalment of advance tax inasmuch as the income-tax law is indifferent whether the tax comes through advance tax or TDS.

If the amount happens to be considerable, the victim can also pursue civil remedies against the `negligor'.

(ASK! Send in your queries on accounting, auditing, corporate law and taxation to ask@thehindu.co.in)

S. Murlidharan

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