Monetisation of perquisites By Masood H. Kizilbash

SINCE long, pay and pension commissions have been recommending monetisation of perquisites for inclusion in pay packages of bureaucrats. However, these were cleverly scuttled and not implemented under the pressure of civil and military officials.

In 1947, Pakistan inherited as many as 650 pay scales and service benefits. The first Pay and Pension Commission headed by Justice Muneer retained them all, reviewed and revised the salary structure on the principle of “minimum living wage.”

The foundation of the salary structure laid down by the Muneer Commission without linking it to prioritised service structure that the state required badly, remained the guiding principle of pay and pension commissions prior to 1972 by defining a minimum wage and adjusting the pay and pension of officials on the basis of cost of living index. The approach gave birth to many distortions and contradictions in service and salary structures which had no relevance to the emerging service needs of the state.

Observing these distortions, a comprehensive administrative restructuring of the services was undertaken in 1972 by abolishing discriminatory ranking of services and substituting them with functional groups. The pay scales numbering 650 were slashed to 22 and all functional groups were placed in the same pay scale. The state treated all functions equally, be it maintenance of law and order, revenue collection, administration of justice, education or health services. This not only led to general discontentment among the rank and file of bureaucracy but impinged heavily on the performance in the key sectors of the economy.

Following the administrative reforms of 1972, the perquisites of the government servants have continued to grow at all levels. The first salvo came when on the recommendation of the National Pay Commission-1972-73 headed by late Mumtaz Hasan, house rent allowance was made admissible to all categories of the government servants at the rate of 15 per cent of minimum of scale. This stood in contrast with the practice of providing a house or a housing allowance to non-gazetted officials only. What was more important was that the decision implied acceptance of the principle of providing housing accommodation as the responsibility of the state.

With cost of living playing no role in revision of pay package in subsequent years, the officials were compensated for inflationary increase in prices by either granting tax free cash ad hoc compensation in the form of dearness allowance, increase in house rent conveyance allowance, medical allowance or extending non-monetary perquisites such as free telephone, an orderly, free car with chauffeur, government owned or hired accommodation..

As a result of liberal grant of tax free or low tax elements and perquisites, their proportion in the pay package was preponderant. The Pay Committee 1983, headed by Mr A.G.N. Kazi recognised it by observing that, “including rent of house, a scale 22 officer will get in 1983-84 only about 40 per cent of his salary in cash and rest in low tax perquisites……it should be explained that higher taxable salaries do not involve larger net expenditure by the government, they merely provide greater flexibility to officers to plan their expenditure.”

The subsequent pay committees of 1987, 1990 i993, 2001 and 2005 made similar recommendations. However, each time , recommendations for monetisation of perquisites were ignored and put to rest in the shelves of the ministry of finance.

This resistance continues despite the fact that under Income Tax Ordinance 2001 and Income Tax Rules--2002, a number of tax exempt allowances are now included in income for tax purposes. However, the provision of a threshold of salary income below Rs600,000 per annum provides a leverage to the government servants not to include annual value of their accommodation if rated below 45 per cent of the minimum time scale of basic salary, especially in absence of market-based rating of the annual letting value.

Similarly, if a car is provided by the government, only Rs3600 are added to salary income for taxation purposes. These two perquisites--unfurnished accommodation and free chauffeur-driven car-- are so big a component in the pay package that the officials oppose any move aimed at monetisation.

The unfortunate part of our tax culture is that the decisions are swayed in the interest of one powerful group or the other with a scant regard to the interests of the state. While the finance minister must be exploring various sources for bringing them into tax net, he may consider the proposed option not only for correcting this anomaly but starting reforms in our service structure and their compensation scales as per models introduced in recent past in many countries including Malaysia, Chile, Mexico, UK, Canada Hungary for meeting challenges of governance in the 21st century.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/monetisation-of-perquisites-150