Lament of tax school purists: This one bites hard

The devil, they say, is in the fine print. If so, then the armchair experts who were pushed to ‘rate’ Budget 2005 must have found ...

The devil, they say, is in the fine print. If so, then the armchair experts who were pushed to ‘rate’ Budget 2005 must have found the devil popping out of the pages and biting them in the nose.

The proposal to levy a fringe benefit tax is entirely misconceived and it is difficult to imagine that the consequences have been entirely appreciated.

For one thing, it is a presumptive tax. This means that by a fiction of law, tax would be levied irrespective of whether the expenditure incurred results in any benefit to the employees.

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Effectively, therefore, what is sought to be taxed is not the income arising to either the employer or the employee, but rather expenditure incurred by the employer.

The consequences are on par with the imposition of an expenditure tax, which in turn will dissuade spending and consequently hamper growth. If the finance minister wanted to apply brakes to an overheated economy, he could not have done better than to impose a tax on spending, which is what the fringe benefit tax translates into.

Reinforcing this perspective is that the tax is payable irrespective of whether the employer incurs losses or earns profits. Thus, for a loss-making enterprise, the fringe benefit tax will be an additional cost. And of course, the amount of tax paid would not be deductible in computing taxable income.

Consider the following. Every time an executive travels, or entertains customers, a pre-determined percentage of the expenditure incurred by his employer will be considered to be a fringe benefit and therefore the employer will pay 31.365 per cent of such fringe benefit as tax.

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The most affected are likely to be the IT companies since they are the ones who provide significant benefits and amenities to employees in an effort to retain skilled personnel. It should also be noted that the fringe benefit tax is applicable to all employers, including individuals. Therefore, small businesses are also going to be affected by this levy.

Another Budget proposal which is bound to raise the hackles of purists is the levy of a 0.1 per cent tax on banking cash transactions in excess of Rs 10,000 a day. As the Finance Minister correctly pointed out, the amount of the tax is not significant. Conceptually, however, income tax is a tax on “income” whereas this levy is a transaction tax.

The problem with this proposal is that it would apply equally to post-tax income, thus resulting in double taxation. Imagine the salaried individual who has already had tax deducted at source before his pay check is credited to his bank account.

If he withdraws cash exceeding Rs. 10,000 on any day for household expenditure, he will again pay tax.

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Once again, therefore, we have the sceptre of multi-point tax layers, double taxation and tax on transactions or expenditure instead of just tax on “income.”

(The author is senior partner at a legal firm)