The concept and development of Dearness Allowance
THIS ARTICLE WAS WRITTEN BY SHUBHANGI GANDHI, A STUDENT OF RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PUNJAB
INTRODUCTION
It is known to all that an economy consists of a public sector (state controlled), private sector (owned by individuals or private bodies) as well as a voluntary sector (having all not-for-profit organisations in its ambit).
Specifically speaking of the public sector; all public sector employers (in most basic terms the government) pay their employees (government servants) a basic salary. However, what makes this salary special are the several other components that are calculated and added to a fixed basic salary to finally reach to a take-home amount. These components can be Travel Allowance (TA), Home Rent Allowance (HRA) etc.
One such component of a government servant’s salary is Dearness Allowance (DA).
By definition “Dearness Allowance is cost of living adjustment allowance which the government pays to the employees of the public sector as well as pensioners of the same.”[1]
According to The All India Services (Dearness Allowance) Rules, 1972,
“Every member of the Service and every officer, whose initial pay is fixed in accordance with sub-rule (5) or sub-rule (6A) of rule 4 of the Indian Administrative Service (Pay) Rules, 1954 or sub-rule (5) of rule 4 of the Indian Police Service (Pay) Rules, 1954 or sub-rule (6) of rule 4 of the Indian Forest Service (Pay) Rules, 1968, shall be entitled to draw dearness allowance at such rates, and subject to such conditions, as may be specified by the Central Government, from time to time, in respect of the officers of Central Civil Services, Class I.”[2]
- ‘A member of the service’ according to definition in All India Services (Dearness Allowance) Rules, 1972 means a member of an All-India services. Such services are clearly defined in 2 of the All-India Services Act, 1951. It in its most basic sense means any person in under any Indian administrative, police, forest, medical or engineering services.
While all government employees and also the pensioners are entitled to a DA, the employees of private companies do not hold any such rights. It is at the discretion of the company and the nature of the employment contract as to whether or not any DA would be given. Therefore, no private company can be forced to pay a DA. If it does so, it would not be a valid ground for tax exemption.
We shall talk about the concept, history and the development of Dearness allowance in detail further through the article.
CONCEPT
In the most basic sense, a dearness allowance is paid to government servants as a cost of living. It is to help them cope with inflation and increasing prices.
Why is such a component needed? What is the reason and concept behind it?
To explain the concept, we will take the help of an example:
Suppose there are three police officers of the same rank- X, Y and Z.
X is posted in Delhi, Y is posted in Assam and Z is posted in Goa.
By applying the All-India Services Act, 1951; X, Y and Z, all three fall under the category of ‘member of a service’ hence, they are eligible for a DA.
It is also to be noted that the basic component of the salary of a police officer would be fixed. Therefore, X, Y and Z all three would receive the same amount from the government as their basic salary. But we cannot overlook the fact that X, Y and Z are all posted in three different parts of the country. Therefore, depending on the market of the place where X, Y and Z are, their costs of living would vary from each other!
To break it into simpler words, the cost of a similar product for example bread may vary in Delhi, Assam and Goa. Delhi might have a higher price whereas Assam and Goa might have a lower price for bread. Similarly, the prices may vary for various products. Thus, it would be unfair if X, Y and Z are made to live their life on an equal salary.
This is where DA comes to play its part. The cost of living is calculated taking a lot of factors into consideration and a dearness allowance is calculated for every employee.
As the cost of living differs from state to state, the DA differs from employee to employee.
Hence, as India is a vast country of many districts, villages, sub-districts as well as cities, the concept of dearness allowance is imperative. The government servants in question, for e.g., engineers, health workers or police people have to posted throughout the country. However, the cost of living does not remain constant throughout the country.
Now in a changed scenario, the members of All-India services are not permanently posted in one state, city or even district. It is a job involving high number of transfers. Coming back to our previous example:
Suppose X is transferred from Delhi to Assam and Y is transferred from Assam to Delhi. It might happen so that X’s cost of living might considerably go down whereas Y’s may increase. Therefore, their DA will also decrease and increase respectively depending on the cost of living in the city they transfer to.
Therefore, owing to the nature of the job of such government employees, Dearness Allowance is a very essential concept.
No matter how much the government has tried to control inflation via different policies and practices, such can not be controlled. Inflation depends in the market’s demand and supply. An employee having a fixed salary would fail to cope with such an unpredictable market. Hence, keeping in mind the fluctuating nature of the markets, DA again becomes a very important concept.
Economists use different formulas to calculate the DA for employees of central government and for central public sector employees. They use the concept of consumer price index for the calculation of DA. ‘The Central Pay Commission’ decides on factors such as DA will be paid twice a year 1 January and 1 July (IV commission), Base year would be taken as 2001 for calculation (VI commission) etc. Such a commission was established particularly to look into the matters of payment for members of all Indian services.
HISTORY AND DEVELOPMENT
Dearness Allowance is compensatory part of wages. It has been in existence for about four decades and now covers almost all employees in the organised sector. Accordingly, it has emerged as an important area of pay administration having financial, economic and administrative implications. [3]
Its origins can be traced back to the times of World War II. In those times it was introduced by the name of ‘Dear Food Allowance’. At that time such a DA was provided to subside the demand of a wage rise by the government employees.
Originally, it was the textile industry in Bombay which introduced DA scheme. Bombay was found to be the most expensive city to live in in our country. It would also go on to become the most expensive sometimes throughout the world. It moves from time to time and so the atmosphere with it also moves.
At different times different cities had varying price levels that in turn affected price indices of every city. It was then the times when each price index was differently numbered, marked and recorded in each state. For e.g., Bombay PI, Delhi PI, Kolkata PI etc. Since the basic concept of Dearness Allowance is based on the concept of Price Index, an All-India Consumer Price Index (AICPI) was established. In current times, the PI of 2001 is taken as the base index to calculate the DA for employees.
As cost of living, inflation kept going up from time to time, it became extremely difficult for the common man to keep surviving. India already facing massive issues of unemployment, the Indian government had to take cognizance of such daily life struggles. It was then that the government went on to establish ‘Pay Commissions’ to keep a check on the PI and keep making changes to DA accordingly. The government keeps appointing the commissions from every 5-7 years to revise base PI or to suggest any changes in the paying system for the government employees. These changes if implemented stay until the next commission suggests some other changes. For e.g., the fourth pay commission for the Central Government employees said that the “Dearness allowance which is being paid at present is in the nature of a compensatory payment to employees for erosion in the real value of their salaries resulting from price rise.”[4]
Not just the central government, the state governments also pay its employees particular dearness allowance. Such an allowance is based on almost same pattern of calculation as the central government’s. However, since the pay scales of state government employees are linked to different index levels, the actual rates of dearness allowance paid by them are different from those payable to central government employees.[5]
Since the inception of the concept of DA, there have been many changes to it. In particularly, with regards to what employees it will cover, what percentage of neutralization would exist for various categories as well as the periodicity of payment.
1st and 2nd pay commissions had suggested giving out DA at flat rates for employees of different pay scales at different levels of CPI. This would mean a sub-inspector as well as a police commissioner would receive the DA at the same rate. This is because flat rate is when the charge or level of payment is same in all cases.
As this seems unfair and disrespectful for higher levelled employees, 3rd and the 4th Pay Commissions linked the DA with both the CPI as well as the pay grade of the employee. These commissions recommended the DA to be a percentage of the basic salary or pay.
In 1996 when the 5th Central Pay Commission (CPC) came into existence the CPI stood at 306.03. Hence, it began the calculation for DA at 0% from January 1st, 1996. However, in 2004 the CPI rose 50% above 306.03 and a DA of 50% was provided to all workers. The addition of this 50% to the basic pay was termed as ‘Dearness Pay’. Since then, every increase in DA is calculated on an amount including both the basic pay and the dearness pay.
The 6th Pay Commission devoted an entire chapter in its report to Dearness Allowance payable to member of All-India services AKA government employees.
Presently, the sanction of Dearness Allowance calculated six monthly increase in the All-India Consumer Price Index (Industrial Workers) (AICPI-IW) with base year 1982=100.[6]
CASE LAWS AND PRESENT CASE
Owing to the recent COVID-19 outbreak, the central government took a harsh decision and decided to freeze the DA for more than 50 lakh of its employees including pensioners in retrospect from January 2020. This allowance was otherwise scheduled to go out in April of 2020.
The Delhi state government followed a similar step and froze such allowances to its employees.
Such a sudden decision by the governments led to the case of N Pradeep Sharma v. UOI. The plaintiff, Mr. Sharma filed a petition in the Delhi High court challenging the state and central government’s decision to freeze dearness allowance of its employees. The petition said that the right to receive salary falls under the category of ‘property’ under Art. 300A of the Indian constitution. Such a right cannot be abridged by the government but only an authority of law. It further said that such a decision is in violation of Art. 21 of the constitution which specifies a right to life with dignity.
However, on 1 June 2020, a bench consisting Justices Vipin Sanghi and Rajnish Bhatnagar dismissed the said plea filed by the plaintiff. The bench went on to point out that under the All India Services (DA) Rules, 1972, entitlement to draw DA is determined by the Central government and it can impose whatever conditions it deems fit from time to time.[7]
The court also went on to reiterate that it not a right of central government employees to receive a higher DA or DR or on regular intervals.
However, a 69-year-old retired military officer, Major Onkar Singh Guleria went on to file a PIL in the Supreme Court for the same. He specified that the worldwide pandemic has had adverse effects on him and many other veterans like him. He feels that these dignitaries deserve to live a respectful life.
The petition of Onkar Singh Guleria v. UOI said that:
“It has come as a big blow especially to pensioners at a time when all veterans are more vulnerable to catching COVID 19 VIRUS (China Originated Virus in December 19) as being daily advocated by Prime Minister of India and all functionaries of Union of India and Doctors through media and advisory letters in black and white.”[8]
While these cases talk about their fundamental right to life with dignity under art. 21, The State of Madhya Pradesh vs G. C. Mandawar talks about DA considering art. 14- the right to equality. In this case the respondent was an employee of the state government of Madhya Pradesh. This state government had fixed a rate of DA practically like the central government for salaries over Rs 400 per mensem in 1948 but was a little less than the centre’s allowance. The respondent challenged the validity of such a discrimination on the grounds of art. 14 of the constitution and said that it was his fundamental right to be treated equally as the central government employees.
However, the court held that under rule 44 of the fundamental rules, it lays on the discretion of the local government whether it shall provide dearness allowance to any of its employee and if so, how much. It further said that art. 14 does not in any way invalidate the law of one state just because it is in contrast with the law of another state.
A similar situation was noticed in the case of Malin Kanta Paul v. State of Tripura. Here the state government of Tripura had provided a similar rate of DA at same intervals to its employees as well as pensioners. However, it was lower than the centre govt’s as the state govt. lacked resources. This discrimination was again challenged, and a same decision was held i.e., it is on the discretion of the state govt. the amount of DA it gives to its employees. It need not be same as the central government.
We also have cases such as UOI and Others v. G. Vasudevan Pillay and Others and UOI and Others v. Rekha Majhi which raise questions such as whether a person is entitled to two DA one on his pension other on family pension. If an employee is re-employed to the same government department, he/she gets 2 pensions. One is the pension of the said person and other is of the deceased person i.e., the family pension. A DA is to be given on pensions as well. However, Rule 21 of the Railways Services (Pension) Rules, 1993 says that:
“21. Dearness relief on pension or family pension
(i) …………….
(ii) If a pensioner is re-employed under the Central or a State Government or a Corporation, Company, Body or Bank under such Government in India or abroad including permanent absorption in such Corporation, Company, Body or Bank he shall not be eligible to draw dearness relief on pension or family pension during the period of such re-employment.”[9]
Therefore, A person is not entitled to two Dearness allowances. As it is an allowance for coping up with the fluctuations in price index, you can avail such on your pension in cases of re-employment.
WAY FORWARD
The world is constantly changing. We all have heard our grandfathers brag about feeling the king of the world in Rs 2. While our fathers felt the same in Rs 20, it takes us Rs 200 to buy a burger these days. We don’t even value the 2 Rs that made our grandfathers feel so rich in his times.
As economies progress, various market factors and international factors change the value of our currency. Many a times the value of INR is depreciated by our own government to increase exports, world trade and control inflation. While a layman does not understand such intrinsic and detailed economics, he surely is affected by it all. To minimise the affect if such adverse effects of sometimes imperative economic policies, concepts like Dearness Allowances were established.
When market prices rise and fall due to various factors, the cost of living of a human being also rises and falls. We may say that neither the market nor the cost of our living the lives we live remains constant. To fight such battles, all government employees get dearness allowance.
There are days when we see infinite ques at the petrol pumps. We hear people say that the petrol prices will be rising by 4 Rs tomorrow hence everyone is there to fill up their tanks at a lower price. This is the biggest example of market shifts and why DA is necessary.
Dearness Allowance however, is not compulsorily provided to employees of the private sector. Which in my opinion should not be the case. Such DA should be tax exempted and made compulsory for the betterment of all lives.
[1] Dearness Allowance, BANK BAZAAR, https://www.bankbazaar.com/tax/dearness-allowance.html.
[2] The All-India Services (Dearness Allowance) Rules, 1972, Acts of Parliament, 1972 (India).
[3] History of Dearness Allowance, 7TH PAY COMMISSION NEWS, https://7thpaycommissionnews.in/history-of-dearness-allowance/.
[4] Id.
[5] Id.
[6] Id.
[7] COVID-19: Delhi HC Dismisses Plea Challenging Centre’s Decision to Freeze DA, THE WIRE (2 June, 2020), https://thewire.in/law/covid-19-delhi-hc-dismisses-plea-challenging-centres-decision-to-freeze-da.
[8] Retired Military Officer moves SC against Govt order on Freezing DA, LATEST LAWS (26 April, 2020), https://www.latestlaws.com/latest-news/retired-military-officer-moves-sc-against-govt-order-on-freezing-da/.
[9] Railways Services (Pension) Rules, 1993, Acts of Parliament, 1993 (India).
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