The Hindu Business Line : Season of taxes

IF ANYTHING, the two most controversial taxes introduced by the Union Finance Minister in this year's Budget, subsequently passed by Parliament, have had the effect of making the Indian tax structure even more complicated and unfriendly to the taxpayer. The two taxes are the banking cash transaction tax and the fringe benefit tax.

Taking the second imposition first: Paragraph 160 of the Union Budget speech reads: "I have looked into the present system of taxing perquisites and I have found that many perquisites are disguised as fringe benefits, and escape tax.

Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material value.

"At present, where the benefits are fully attributable to the employee they are taxed in the hands of the employee; that position will continue. In addition, I now propose that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer.

However, transport services for workers and staff and canteen services in an office or factory will be outside the tax net. The tax is not a new tax, although I am obliged to call it by a new name, namely, Fringe Benefits Tax. The rate will be 30 per cent on an appropriately defined base."

Clearly, this is a revenue-garnering measure, the justification coming in the shape of the argument that the step merely plugs a loophole in the existing taxation system.

In other words, if individuals are liable to pay a tax on what has been described as `fringe benefits', when these benefits are enjoyed at the discrete, individual level, there is no reason why the same, and other, individuals should not be liable to pay the same tax when such benefits are enjoyed by them collectively.

The only material difference is that here the provider of the fringe benefit will have to pay the tax while in the existing scenario it is the receiver of the benefit who footed the tax bill.

It can be argued that the FBT will be a disincentive for employers to continue with existing collective fringe benefits and prevent them from providing fresh such benefits to their employees.

If this is in fact the case, the FBT is a regressive tax as far as employee welfare is concerned, and the Finance Minister will have to take full responsibility for introducing such a measure in today's liberalised, incentive-oriented world.

As regards the banking cash transaction tax, paragraph 177 of the Budget speech reads thus: "The NCMP (National Common Minimum Programme) requires the Government to introduce special schemes to unearth black money and assets. I am obliged to carry out the mandate, but without giving undeserved relief or an amnesty. I am concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amounts of cash.

"These cash withdrawals leave no trail, and presumably become part of the black economy. Therefore, I propose to introduce two anti tax-evasion measures: Firstly, I propose to levy a tax on withdrawal of cash on a single day of over Rs 10,000 or more from banks at the rate of 0.1 per cent. Thus, a person withdrawing Rs 10,000 in cash would have to pay a small sum of Rs 10. Secondly, I propose to require banks to report to the Government all deposits which are exempt from TDS on interest. I intend to observe the results of these steps before I propose any further measures."

Subsequently, two changes have been made in the first proposal, namely, savings bank account withdrawals have been exempted and, secondly, the threshold has been raised to Rs 25,000.

The Finance Minister has said clearly that the purpose of the tax is to discourage black money transactions by having bank transactions of this sort leave a `tax trail'.

If the declared objective is indeed to keep a record of such withdrawals with the tax people, why cannot PAN used instead of the 0.1 per cent cess?

The only thing required to make the new system work is that banks should keep the tax officials informed of all such transactions along with their PAN.

If, as the Finance Minister has said, no one who withdraws Rs 25,000 at one go from a bank can be described as being "too poor to pay the tax", it is almost certain that that person will have a PAN.

And if he has a PAN, the tax trail is established the moment the number is recorded.

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