Are the much-hated fringe benefits tax (FBT) and the banking cash transaction tax (BCTT) going to make a comeback in budget 2015-16? Will farmers earning more than Rs 50 lakh per annum be brought in the tax net?
If the Parthasarathi Shome Tax Administration Reforms Committee (TARC) had its way, the answer would be yes, yes, yes. But if one were to look at the precarious state of India's economic recovery, the answer is probably no, maybe, no. Two of the three ideas may be DOA - dead on arrival. BCTT is a borderline case.
According to a Mint report, the committee had recommended all three measures to widen the tax base.
FBT, it said, "would be an effective measure to widen the direct tax base. This is a good temporary administrative measure for enhancing tax collection, until rising income tax collection makes it unnecessary." In other words, it is a good tax to reintroduce right now, when tax revenues are sluggish.
As for BCTT, under which cash withdrawals of more than Rs 50,000 from individual bank accounts and Rs 1 lakh from other accounts would earlier attract a small withdrawal tax, this is what Shome had to say on its reinstatement : "With its withdrawal, an important source of information to monitor transactions of unaccounted money has dried up," says the Mint report. The BCTT, though it didn't earn much in terms of tax revenues, gave the taxman an audit trail to track cash transactions - and hence put a check on black money that passed through bank channels.
About taxing farm incomes above Rs 50 lakh, Shome recommends it and then, more or less, admits that it can't be done without a political consensus. He says that taxing farm incomes above Rs 50 lakh would help close "one escape route for black money," but also points out that changes of this sort would require an "across-the-board" political consensus - something impossible in this Lok Sabha where the opposition parties are waiting to pounce on any politically-difficult government proposal to kill it in the Rajya Sabha.
Looking at the three taxes, FBT is clearly not worth the effort if it is specifically going to exclude government servants and legislators from its ambit - two major beneficiaries of fringe benefits. An FBT is different from the taxation of employee perquisites which are taxed anyway. It is applicable on those expenditures which a company may incur and from which employees may (or may not) benefit, but which are not specifically counted as part of employee compensation (for example, a foreign holiday disguised as a skill-building conference).
The net result was the FBT often ended up taxing business expenditure (like entertainment expenses, which could benefit the employee but was not intended as an employee perk). The FBT, before it was abolished, was a huge revenue generator (around Rs 4,000-6,000 crore per annum), but corporates were unhappy with the book-keeping they had to do. So out it went in the 2009-10 budget.
The BCCT, on the other hand, has a better purpose beyond revenue, since it enables the government to restrict the use of cash and track large withdrawals. It was withdrawn in 2009 under pressure from big money and politicians. But its reinstatement at this stage will queer the business climate, some feel. On the other hand, its reintroduction would be a signal that the government is keen to deter black money generation.
I wouldn't rule out its reintroduction, especially if Arun Jaitley wants to recover from the negative perception that the NDA government is dilly-dallying in its fight against black money. If he can make the rest of the budget a "wow" event, he can slip in a BCTT proposal without too much effort. But I wouldn't bet on it.
The only tax that, one can be sure, will not even be considered is the agricultural income tax. If we have been unable to defeat the farm lobby for 67 years, it is unlikely that the NDA is going to change the game in the 68th year.
The introduction and extinction of a tax in India is fairly arbitrary, with a lot depending on who the finance minister is.
The FBT and the BCTT were introduced by P Chidambaram. They were abolished by his successor Pranab Mukherjee. Both within the same UPA government.
The dividend distribution tax (DDT) was introduced by Chidambaram during the 1996-98 UF government, but it was abolished by Yashwant Sinha during the Vajpayee era in 2002-03, only to be restored by his successor Jaswant Singh. The abolition and reinstatement both happened within the NDA regime.
Taxing dividend in the hands of the receiver rather than at the company (or mutual fund) end is equitable, for the receiver then pays tax at his marginal rate. Now, whether you are a small investor or a big one, you pay the same tax - with the company deducting it in advance.
The DDT deserves to go - but big promoters and stock market mavens believe it is a sentiment driver in stocks. Jaitley, may, thus not pick up the courage to abolish it.
In sum, Budget 2015-16 is unlikely to do much on any of the Shome recommendations, saving them all for better times. No one wants to poop the stock market party right now.
Updated Date: Jan 20, 2015 18:12:45 IST