An employee
To reduce tax liability for their employees, some companies would give a food allowance on a daily or monthly basis. As this was not part of their income, it couldn’t be taxed. But the IT (Income tax) department thought that money given as allowance was being redirected elsewhere. This led to the concept of coupons that would be accepted at food joints only. It means that an employee gets a part of his income as food coupons.
A retailer
The organization issuing the coupons offers to collect coupons from the retailer every 15 or so days in exchange for cash if he is willing to accept coupons from his customers. There’s one catch though, only 95% of the coupon’s value is actually refunded, the remaining 5% has to be borne by the retailer. That begs the question… why does the retailer agree to this? It’s because all the other retailers are doing it. He knows that most employed people in his area will have to spend all their food coupons within one month, which means they would prefer stores that accept those coupons. In other words, it is an assurance of business.
A few food outlets (only a few) may actually increase their prices in order to recover that 5% loss from their customers.
The organization issuing coupons
Well, for them, it’s a dream come true. They literally print their money. For every rupee that this organization prints and distributes to different companies, it earns about 5 paisa as profit.
The IT department
It now has all the assurance it needs that the tax break it is providing will not be misused.
When somebody is making money, somebody else is loosing it. It’s obvious that in this case everybody other than the government is on the receiving end. Basically, a part of the income tax paid by employees is now shared by the employee and the coupon issuer equally!
The figures are surprising. If you come in the <5 lpa tax bracket, your tax rate is 10%. Generally, employees are given approximately 2000 rupees worth of food coupons every month i.e 24000 rupees a year. Given that coupon issuers have a profit margin of 5 %, you eventually end up paying 1200 rupees to the coupon issuer rather than paying 2400 to the government.
There are two rather subtle effects of this. I confess that both are speculations and I cannot prove them.
- When the government can’t make enough money from income tax, it has to find other ways to raise money including other forms of taxation.
- It is unfair to self employed people like street hawkers and small scale businesses in the food retail sector because our coupon issuers do not have the resources or the inclination to collect coupons from outlets with low sales or are not even registered (in the case of street hawkers) as that would increase their operating cost. From a consumer's point of view this also reduces the available choice.
The way I see it, when an employee accepts food coupons, he not only makes a promise to spend that amount on food but also that he will spend it at the outlets supported by the issuer only. This is contrary to one of the underlying concepts of progressive taxation (increasing tax with income to promote economic equality). It makes it more difficult for small scale businesses to compete with well established ones.
A simple solution
Do you think it is safe to assume that anybody who earns enough to fall into the medium tax bracket (40000 per month) will spend atleast 66 rupees a day on food? Well, that is exactly what the IT department asks that person to prove when he accepts 2000 rupees (Rs 66 per day) worth of food coupons.
These coupon issuers can be taken out of the equation if the government is also ready to make this safe assumption and provide every tax payer with a food rebate on his taxable income.
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So the only people losing out on this is the street vendors. While this might have an immediate effect on them, it will encourge them to move from the unorganised sector to the organised sector. Over a long run, it might actually be a good thing.
ReplyDeleteBut wont it be better if the govt itself issues these coupons...atleast the 5% that the middlemen r making ll be eliminated.
Its not just the street vendors but also the employees themselves because they have to bear that 5% which the middlemen make.Also, moving from the unorganized sector to the organized sector is going to be more difficult with a coupon system.
ReplyDeleteThere's two problems with the government implementing such a scheme. One is the effect it has on the unorganized sector which won;t be solved even if the govt becomes the issuer and the other is that the entire system would come at a price which the govt will have to bear.
If you look at the implementation of another retail scheme, the public distribution system, the results are not very encouraging. It raises doubts about the govt's ability to implement a scheme like this.
Hmm.. you guys are looking at a bachelor's point of view.Assuming that every one of those food coupons go to one of those kinda of cheap food outlets where the increase the price by 5% to keep their profit margin.
ReplyDeleteNow assume a married man or a bachelor with a cook at his home (generally a guy who doesn't eat outside more that once a week), he will spend food coupons buying groceries at big marts (where they accept the coupons) and branded restaurants.The marts don't care that they are losing 5% because the attract the masses with their significantly high seeming discounts and the branded food outlets have such a high profit margin that they are willing to sacrifice a mere 5% for more customers.
Now from the above cases its fairly obvious that customer is at profit here.
Now to the street vendors dilemma. Its not like the employees are given only coupons and are asked to compulsorily use that while buying food.Maybe the sales of the street vendors may decrease just a tiny bit (I severely doubt that though).Actually it may actually increase though, since using sodexo's give a false feeling that you are not spending anything on food which will make them snack a little more that usual(These are obviously speculations).So even the street vendors are at profit here.
Now to the government.Its not easy to just add a new tax and hence the government will have to use the resource efficiently which will decrease the amount of money gobbled up by the politicians which of course is always good.
Though your solution is quite good, there is a major flaw in it(which is why the sodexo's work).Once the government is the one giving the food tax rebate, the power shifts from the employer to the government.
Now if the employee's want 3000 sodexo's instead of 2000, they ask their employer who in turn via whatever complicated procedure there is to request the Income Tax department (and bribing officials along the way of course) can make that possible.
But if the government was the one giving the tax rebate there will have to strikes riots etc etc before the amount changes.
I am not saying that this is good,but since the employees are profited immensely here
and the rural don't even know what a sodexo coupon is, it still prevails.
Thank you for giving this so much thought.
ReplyDeleteI strongly disagree when you say that implementation of a food rebate will be a problem. I am sure you know that the government or the income tax department does give you tax rebates for expenditure on education, life insurance, home and car loans and long term investments. If all these rebates can be implemented without any riots, strikes or bribes, then I don't see what makes implementation of a food rebate so difficult.
If someone spends all their food coupons in a mall, then I agree that financially, they don't loose anything, but removing a coupon system gives employees more choice and helps setup a more level playing field for large as well as small retailers.
It is wrong to believe that reducing the amount of money the government has will reduce corruption in any way and lead to more efficient utilization of funds. On the other hand, I am sure that it would decrease government expenditure on various schemes involving infrastructure, poverty alleviation, public health etc.
When you say its not easy for the government to add a new kind of taxation, thats not very accurate. In the last few years we have had Value added tax (12%) and education cess(2%) among other forms of taxation. So, I don't think the government will have a problem with higher taxation.
Maybe the reduction will funds will decrease the government expenditure instead decreasing the corruption or maybe the corruption will decrease (just being optimistic there).
ReplyDeleteAlso adding a tax isn't that easy. Vat was added a few years but there were a lot of strikes and 8 of the 28 states still don't have VAT.
The idea behind issuing the coupons is to make sure that atleast some money is not wasted on alcohol, gambling etc.
ReplyDeleteAlso this is one way to make sure that the food that the people eat is of a certain standard. And giving a food rebate will not satisify defeat both the criteria.
But I dont understand why the coupons are given to IT professionals etc... I ll make a lot more sense if this kind of system to monitor the amnt and quality of food is implemented for the poorest people of the country.
As a matter of fact there was a coupon system introduced in the Public Distribution System a few years ago to monitor the amount of food being distributed to people below the poverty line. Unfortunately, the implementation of the scheme did not go as expected, two of the major reasons being counterfeiting of the coupons and lack of awareness. This was the reason that in my previous response to you I said that I seriously doubt the government's ability to run such a system.
ReplyDeleteFood is the primary requirement for everyone and will take precedence over everything else. The assumption behind a food rebate is that everyone, including alcoholic gamblers (:P) will have to spend a certain amount of money on food every month and that is the amount that will be exempted from tax.
It would be great if coupon issuers chose food outlets on the basis of food quality alone. But, they might choose not to do business with outlets that maintain high quality standards but do not have high sales. (As it isn't profitable enough). These are the outlets that I think are at a disadvantage.