Friday, August 26, 2016

The Payment of Bonus (Amendment) Act, 2015 - Whether retrospective for Financial Year 2014-15

The Payment of Bonus (Amendment) Act, 2015 received presidential assent on 31 December 2015. The Amendment Act provides for major changes in the eligibility limit and increase in ceiling for calculation of bonus of employees under the Payment of Bonus Act,1965. These amendments are made on the requests of trade unions but making it effective retrospective is very harsh and burdensome for employers.
The payment of Bonus (Amendment) Act, 2015 has three significant changes which have affected employers’ budgets for payment of salaries for financial year 15-16
1.       This Act may be called The Payment of Bonus (Amendment) Act, 2015. It shall be deemed to have come into force on the 1st day of April, 2014.
The provisions of the Payment of Bonus (Amendment) Act, 2015 shall be deemed to have come into force on the 1st day of April, 2014. 

2.       The Amendment in Section 2 for Increase in the Eligibility Limit :
 In section 2 of the Payment of Bonus Act, 1965 in clause (13), for the words ‘‘ten thousand rupees’’, the words ‘‘twenty-one thousand rupees’’ shall be substituted.

Effect  : The Payment of Bonus (Amendment) Act, 2015 has enhanced the eligibility limit under section 2(13) from Rs.10,000/- per month to Rs.21,000/- per month.
3.       Amendment in Section 12 for increase in Calculation Ceiling :

 In section 12 of the principal Act,—
(i) for the words ‘‘three thousand and five hundred rupees’’ at both the places where they occur, the words ‘‘seven thousand rupees or the minimum wage for the scheduled employment, as fixed by the appropriate Government, whichever is higher’’ shall respectively be substituted;

(ii) the following Explanation shall be inserted at the end, namely: ‘Explanation.—For the purposes of this section, the expression ‘‘scheduled employment’’ shall have the same meaning as assigned to it in clause (g) of section 2 of the Minimum Wages Act, 1948.’.

The Calculation Ceiling under section 12 from Rs. 3500 to Rs.7000 or the minimum wage for the scheduled employment, as fixed by the appropriate Government, whichever is higher. 

Key amendments by the Payment of Bonus (Amendment) Act, 2015:
  1. Eligibility Wage Ceiling increased - under the provisions of the previous Act, an employee was eligible to receiving statutory bonus if he had worked for at least 30 days in an accounting year and drew a salary of  Rs.10,000/-  per month,.
 The amendment increases this eligibility limit to a salary threshold of  Rs 21,000/-per month.
  1. The Ceiling for Bonus Calculation increased - under the previous Act, if an eligible employee’s salary were more than Rs3,500/-  per month, for the purposes of calculation of bonus, the salary would be assumed to be limited to Rs.3,500 per month.
 The amendment increased  this wage ceiling from Rs.3500/- to Rs.7,000/- per month or the minimum wage notified for the employment under the Minimum Wages Act, 1948, whichever is higher.
  1. A Retrospective amendment - the amendment has been deemed to be enforced from April 1, 2014.
Old Provisions as per The Bonus Act , 1965 were as under:-
-The bonus payable is to be determined on the basis of profits or on the basis of production or productivity of the establishment.
-The Act is applicable to factories and establishments employing at least 20 persons, although in some Indian states, the Government has extended the applicability of the law by reducing the threshold to factories and establishments employing at least 10 persons.
-The Act requires an employer to pay to an eligible employee a minimum bonus at the rate of 8.33% of the salary earned by the employee during the accounting year.
- As per law, the maximum statutory bonus can be limited to 20% of the employee’s salary.
Reactions from various Industrial Associations on Retrospective Effect from Fin Year 2014-15
-          The retrospective amendments were opposed on the reasoning that the adequate time was not given to employers to plan for such increase in their salary costs. The major issue for retrospective amendment was that employers would not have provided for this expense in the previous financial year (2014-2015) for which the books of accounts were already closed and taxes also paid.
-          Such retrospective application from Financial year 14-15 would lead to financial stress, to the manufacturing sector where the number of workers is high or in case of  Micro, Small and Medium Enterprises.
Stay on Retrospective Effect from April 1, 2014
Upon representations from various industry bodies by way of writ petitions in various State High Courts challenging the retrospective effect from Fin Year 2014-15, several high courts have stayed the retrospective operation i.e Kerala High Court, Karnataka High Court, Madhya Pradesh High Court, Allahabad High Court, Gujarat High Court and Punjab & Haryana High Court have passed interim stay order in January and February, 2016. Thus, within a period of six months more than six states in India have already obtained a stay on the retrospective operation of the amendment from Fin Year 2014-15. In light of the above stay orders it may be taken that the amendment would take effect from the financial year 2015-16 onwards, and not 2014-15 as earlier stipulated. With the financial management of even private companies till date wait and watch policy is being followed but should be sorted out by the Central Government.
In the past history if we see whenever certain provisions were made applicable with retrospective effect in favor of labours, the employers could not succeed in challenging the same on various reasons and issues. Since the matter is currently sub judice, it is yet with the judiciary to balance the amendment. As for future the ceiling and amount of bonus has been increased but for retrospective how Central Govt will balance the welfare of employees with the interests of employers whereas in the past the Central Government has never decided in favour of employers and stay of court seems to the postponement of establishment of retrospective amendment this time too. The history repeats itself so may be this time again may repeat and favour the labour.
Accounting Treatment in Finalisation of Financial Statements for Financial Year 2015-16
1. Make additional provision of Bonus Due for Financial Year 2014-15
2. Make Provision for bonus for Financial Year 2015-16
3. Pay additional bonus if Central Govt decides in favour of labour and establishes the retrospective applicability from 01.04.2015
4. For the companies where they pay bonus @8.33% without considering the ceiling of salary or minimum wage they need not to provide for as such change is not effecting at all as they must have paid more than what is actually required to pay and no additional liability remains unpaid.