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Simple, sensible norms to tax perks
July, 11th 2009

When a tax contributes just about 2.3% to the direct tax kitty, it makes little sense to continue with it, particularly if the cost of compliance is high. In that context, the decision to abolish the fringe benefit tax (FBT) is welcome.

India Inc should also be happy the government did not take up the second part of its suggestion, i.e., raise the corporate tax rate by a couple of percentage points to make up for the revenue loss. However, the decision to replace FBT with a tax on perquisites would no doubt raise the tax liability of the salaried class. And perhaps even complicate their tax calculation.

The onus is on the Central Board of Direct Taxes to write out the notification for taxing perks that is simple to understand and leaves little room for misinterpretation, while ensuring the objectives for which the FBT was introduced are also met.

Readers may recall former FM P Chidambaram had introduced the impost to comprehensively tax all the fringe benefits provided by companies to employees, particularly those at the senior level, over and above their salaries. He had set the tax rate at 30% for a list of perks.

Many suspected the exercise was meant to be only a revenue generating measure, although Mr Chidambaram had argued, vociferously, that it was meant to ensure greater vertical and horizontal equity. For instance, a person who received his entire income in cash bore a higher tax burden than a person who got part of his salary as fringe benefits.

Also, it was mostly the senior executives who enjoyed the benefits, but paid disproportionately lower taxes as compared to those who were not provided such benefits.

If the measure was indeed aimed at generating revenues, collection of Rs 8,000 crore last fiscal and Rs 7,100 crore in 2007-08 does not fully justify the effort companies had to put into calculating their liability. Yet the objective sought to be achieved by FBT is excellent.

Peoples tax liability should be directly proportional to their incomes, received both in cash and kind. We hope the proposed perks tax notification is comprehensive, the method for valuation clearly defined and sensible, and individuals are not overtaxed.

 
 
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