The Hindu Business Line : Fringe benefit tax will make compliance more complicated

The benefit of standard deduction available to the persons having income from salaries has also been withdrawn. The new proposal will be beneficial to a large number of taxpayers; however, certain class of taxpayers will stand to lose. At present, a person having salary income up to Rs 1,30,000 is not required to pay any tax as he is entitled to a benefit of standard deduction of Rs 30,000 and income up to Rs 1 lakh is exempt.

Under the proposed scheme, such person shall be required to pay tax of Rs 3,000 on income exceeding Rs 1 lakh, that is, 10 per cent of Rs 30,000 as the benefit of standard deduction, shall not be available now onwards. In the alternative, this person will be required to make investment in long-term saving of Rs 30,000.

The new tax rate structure shall give an additional benefit to the taxpayers liable for taxation at the higher rate as compared to the person liable for tax at lower rate in respect of investment in long-term savings of the same amount.

In the proposed scheme in respect of long-term savings, there shall be deduction of the total amount invested from the total taxable income as against present scheme whereby a rebate in tax is given of a fixed percentage of the amount invested in long-term savings.

Accordingly, a person liable for higher tax rate will get a benefit of Rs 30,000 for making investment in long-term saving of Rs 1 lakh whereas a person having lower income shall get a rebate of Rs 15,000 only.

Corporate tax rate

The Finance Minister has acceded to the request of industry and has reduced the corporate tax rate from 35 per cent to 30 per cent. He has further stated in his speech that this reduction in corporate rate is being done to remove discrimination of maximum tax rate applicable to an individual and to a company.

Though the effective tax rate shall be 33 per cent, including surcharge of 10 per cent, it is still a good move as it will induce corporatisation of business.

The Finance Minister has also accepted another request of industry, allowing the credit of the Minimum Alternative Tax (MAT) paid by the company.

However, to set off the revenue loss by extending the above concessions, he has reduced the rate of depreciation in respect of plant and machinery from 25 per cent to 15 per cent.

This is going to have serious repercussions on those corporates which are capital intensive and with large investments in machineries, as their effective tax rates have always been much lower because of the higher level of depreciation.

However, corporates in the service sector which do not have large investment in plant and machinery will stand to gain.

Fringe benefit

The Finance Minister has proposed a new scheme whereby employer shall be required to pay tax in respect of the perquisites extended to its employees.

This provision is going to have serious repercussion as the tax shall be payable by all employers irrespective of whether any tax is payable by such employer or not.

As such, all exempt institutions, trust, bodies shall be required to pay 30 per cent fringe benefit tax in respect of the perquisites provided to the employees.

The proposed scheme will make the laws more complicated, and increase the burden on the employer as well as the I-T Department.

Now the employer will be required to file two returns and the department will be required to make two assessments.

The proposal cannot be considered as a move towards simplification of tax laws.

ICAI's suggestions factored in

The ICAI in its pre-Budget memorandum 2005 had pointed out that the rate of corporate tax @ 35 per cent, which was higher than the maximum original rate of 30 per cent applicable to individuals, was hampering corporate sector growth:

The Budget has reduced the corporate tax to 30 per cent plus surcharge @ 10 per cent.

The Institute as a measure to widen the tax base had suggested that Section 139(1) be amended to require that persons paying electricity bills above Rs 25,000 should be required to file return of income:

This suggestion has been accepted and now persons paying electricity bills above Rs 50,000 per annum should file returns.

The institute had recommended that MAT credit be restored:

This suggestion has been accepted as part of reforming corporate taxation.

It had recommended that a threshold limit be fixed in respect of small service providers. Further, it had recommended a threshold limit of Rs 5 lakh:

The Government has fixed a threshold limit of Rs 4 lakh as a relief for small service providers. The Finance Minister has announced that 80 per cent of the service providers may be out of the tax net.

As a measure of encouraging inflow of funds from non-resident Indians, the institute has said that there should be no taxation of income by way of interest on non-resident external account: Exemption allowed on interest on NRE account.

The institute had said that gold must be monetised and made to play a productive role in the economy. Accordingly, banks might be permitted to advance money on the security of gold.

The loans thus taken from the banks could be utilised for productive activities. Thus, gold would indirectly become a productive asset in the economy:

The Budget has recognised the basic philosophy of the suggestion made by the Institute. And the Finance Minister in this regard said in his Budget speech: "... I propose to ask SEBI to permit, in consultation with the RBI, mutual funds to introduce Gold Exchange Traded Funds (GETFs) with gold as the underlying asset, in order to enable any household to buy and sell gold in units for as little as Rs 100. Such units could be traded in the same manner as units of mutual funds."

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