The Hindu Business Line : The logic of tax on fringe benefits, savings

THE idea of reducing tax rates while cutting or eliminating exemptions to bring an element of transparency into the tax regime has been in the air for many years now.

The latest Budget has taken major strides in this direction and done it in a way that increases the revenue from corporate and personal income taxes by more than 30 per cent each.

For corporates, even as the explicit rate of tax has been reduced by about three percentage points, total revenue is expected to go up from Rs 83,000 crore in the revised estimate for 2004-05 to Rs 11,0573 crore, according to the 2005-06 Budget, an increase of 33.2 per cent in a single year.

This has been achieved by reducing the rate of depreciation allowance and, more particularly, by the levy of tax on fringe benefits, which fills a long-perceived need to remedy a situation in which large chunks of what was in effect an addition to personal income escaped tax in anyone's hands by the simple expedient of billing them as corporate expenditure. On the other hand, large sums of money expended by salaried income earners on, say, medicine and education, got taxed as income in their hands. This was the sum and substance of the clarifications on the fringe benefits tax given by the Finance Minister, Mr P. Chidambaram, in Delhi on Wednesday.

"We do not intend to tax legitimate business expenditure on travel, hotels, conferences, etc," he said. As for the rest, if corporates respond by repackaging the perks as salary, then the tax burden will shift from the expenditure accounts of corporates to tax on personal income of their employees.

To this extent, expenditure that might otherwise have been taxable in the hands of corporates will now be eligible for treatment as deductible expenses, as has been the case hitherto.

As far as personal income taxes are concerned, the Budget projects a 30 per cent hike in collections from the Rs 50,929 crore figure shown in the revised estimate for 2004-05. In this case, too, the incremental revenue will accrue despite the drop in tax rates not from additionally strenuous efforts put in by tax collectors, but from the drop in exemptions for aggregate savings, for those whose savings are considerably in excess of the Rs 1 lakh that the Budget proposes to allow as a deduction from gross income.

For those in the low- and mid-income brackets, this concession will more than make good the loss they suffer from the elimination of standard deduction, the Section 88 rebate, and the Section 80L exemption on interest earnings.

Meanwhile, upper income brackets will be able to console themselves with the thought that the easy treatment of capital gains has been left untouched. These continue to be almost entirely beyond the purview of personal income-tax.

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