All items covered by FBT will be affected either by VAT or service tax, which cannot be treated as input tax. In such a case, if no benefit is given for deducting VAT or service tax on these items covered by FBT, it would be tantamount to double taxation.
Consider the following instance. Domestic companies were initially pleased that the corporate tax had been reduced from 35 per cent to 30 per cent. The surcharge, to their displeasure, has been increased from 2.5 per cent to 10 per cent. This is a clever move by the Finance Minister as surcharge is not shared with the States.
Unfortunately, no Chief Minister has raised this point. This inspiteof the fact that the States have to look for funds to the extent of Rs 29,000 crore without assistance from the Centre.
In another instance, while the incremental depreciation has been increased from 15 per cent to 20 per cent, the depreciation on existing assets have been pruned.
Again, while for individuals a new deduction of Rs 1 lakh under Section 80C has been given, it is not for free. The standard deduction has been cut.
With the withdrawal of rebates under Sections 88C and 88B, the senior citizens are likely to lose marginally rather than gain in the proposed tax structure. The deduction available under Section 80L has been withdrawn.
In yet another example, while dredger companies have been included in the Tonnage Act, by removing Clause (vii) of Section 115VD, they are covered by the services tax.
The securities transaction tax, which raised a hue and cry in the last Budget, has been increased.While the Finance Minister termed the increment marginal, he did not rule out revisions in the coming years.
The fine print has revealed that grants are not without strings. However, one welcome feature of the Budget is the introduction of MAT benefit. Another laudable feature is extension of telecommunication facilities to rural areas.
The Budget is not clear whether the benefits will continue to be available under Sections 80(IA) as the Section fixes the period of commencement of operation to be before March 31, 2006. An extension of the period is required to carry the message of "Bharat Nirman".
Cash transcation tax
Given the backlash to his proposal of tax cash transaction, the Finance Minister is on record stating that he would look into it but the tax is here to stay.The logic behind the threshold limit of Rs 10,000 is still not understood.
The reasons given by the Finance Minister at first that the tax has been imposed to check black money, and later that it is to raise funds for the Common Minimum Programme, , are contradictory. And why repeatedly tax the ordinary salaried employee, who pays taxes regularly? Even funeral expenses cannot be met with Rs 10,000.
There are various options available to the Finance Minister to address the problem directly instead of using the indirect method of taxing genuine transactions, a measure that is only going to increase the workload of banking staff.
As the first step to root out black money the funding of elections by political parties should be made transparent. As a corollary to this, each contesting candidate may be made to pay a "service tax", on the basis of the deposit he makes to the political party for getting a ticket.
Thus, undisclosed money will get taxed, at least to some extent.
Fringe benefit tax
According to the Finance Minister, fringe benefit tax (FBT) has been subject to varying treatments in different countries, and he proposes to tax it in the hands of the employers. FBT is the practice in Australia and New Zealand. The conditions and standard of living are India is different.
The Finance Minister has reduced the import duty to keep the tariff levels on par with Asean countries. This is a welcome step.
How many Asean countries have FBT? By making FBT an additional tax where it has to be paid even if the company is at loss, one wonders what the cost push will be for the Indian products.
Will we stay competitive in Asean? The Finance Minister spoke of China attracting more FDI. But China has not introduced FBT. And we are trying to harmonise tax structures within Asean.
A careful reading of the Act reveals that almost all expense items are covered, and one wonders whether the economy is headed towards a regime of expenditure tax, in addition to income-tax, and VAT, which is a consumption tax.
India has several eminent tax consultants, economists, and lawyers to give inputs on measures such as the FBT, and whenever new measures are introduced, this talent bank should be tapped to help draft an unambiguous and lucid law.
Unfortunately, the pre-Budget meetings with various representatives were not aimed at increasing lucidity.
Announcements in the Budget, followed by presentations by representatives from three apex trade chambers in the North Block only exhibit a lack of understanding of the ground realities and a lack of mutual trust required between the tax payer and the tax collector.
Consider the instance of tax on branded jewellery. Following protests, the Centre has come out with an explanation of what is a branded item. Again, all items covered by FBT will be affected either by VAT or service tax, which are to be borne at the point of final consumption and cannot be treated as input tax. In such a case, if no benefit is given for deducting VAT or service tax on these items covered by FBT, it would be tantamount to double taxation. Both in Australia and New Zealand, the law provides for rebates for goods and services tax, under FBT. Due to the low cost of operations, many BPOs have been able to outsource work from overseas. With this additional financial burden, will BPOs remain cost-effective?
As the tax is not deductible, will the companies be profit-oriented and be able to declare attractive dividends? What will this translate to in terms of dealings in the stock exchange? Already the share of small traders in stock exchange dealings has dwindled to 1.5 per cent. The effective rate of corporate tax will be more than the original 35 per cent, what with the increase in surcharge, reduction in depreciation rate on existing machinery, and introduction of FBT.
It is estimated that India Inc., will be shelling out Rs 25,000 crore! If companies resort to trimming their workforce, FBT would result in unemployment or change of the pay structure to the disadvantage of the employees. The FBT tends to discriminate between government, employees and private sector employees. While the proposed levy taxes travel by private sector employees, government employees are not taxed for their local and foreign trips. FBT has even touched hospitalisation benefits. Health is a primary welfare measure and employers have assumed the role of the government.
Medical benefits are provided to employees to safeguard them from occupational hazards and work factors that affect health and longevity. Can they be termed as fringe benefits? These are some of the points the tax pundits in the North Block must consider before giving FBT its final shape. It is better these questions are raised in Parliament before the Bill is passed.
(The author is a Chennai-based chartered accountant)