Personal Tax: Apprehensions allayed

The juggernaut just ambles. The third budget of the United Progressive Alliance (UPA) presented by Finance Minister P Chidambaram (FM) has been voted by India Inc to be "benign" at best.

For some, its 'missed opportunities'. Industry and trade circles feel a lot more could have been done to power ahead in the backdrop of robust fiscal growth of 8.1%, a resurgent Indian economy and strong financial indicators.

On the direct tax front, apprehensions have been allayed. New taxes, especially the much-dreaded inheritance tax and the EET (exempt, exempt, tax) regime, have not been introduced. Further, no increase in tax rates and non-tinkering is clearly a refreshing change to the regular tampering around witnessed in the earlier budgets. Perhaps, this is indicative of the belief that the 'tax policies' are mature.

Individuals have something to rejoice about - their investments up to Rs 1,00,000 in fixed deposits (for five years or more) in scheduled banks and pension funds will now qualify for tax deduction along with payments for life insurance premia, investments in PPF, equity-linked savings plan etc.

The abolition of 'one-by-six' scheme for filing of returns of income would also mean less compliance for people not having taxable income.

Good news is contained in the proposals, especially for expatriates, as interest for delay in payment of tax would now be calculated only after considering foreign taxes. However, whether such foreign taxes can be considered at the time of tax withholding stage by the employer remains unaddressed.

The budget proposals relax certain annual compliances but defer the introduction of non-physical tax withholding certificates by two years. The requirements to obtain and quote PAN have been amplified. This has been introduced as a devise to widen the tax net as the one-by-six scheme stands abolished.

For long-term capital gains, henceforth, investments made only in bonds of NHAI and RECL would qualify for exemption. The earlier qualifying investments in NABARD, SIDBI and NHB bonds would no longer be available for long-term capital gains tax exemption.

The buoyancy in the capital markets has prompted a 25% increase in securities transaction tax but the increase is considered moderate.

Now, coming to Fringe Benefit Tax (FBT), the topic de jour. Relief from FBT was much awaited, especially on genuine business expenditure such as conveyance, travel, sales promotion etc.

The Indian FBT provisions are said to be largely modelled on the Australian FBT regime. However, in Australia, genuine business expenses largely carry a "nil" fringe benefit value. If one glances at the FBT provisions in other countries like New Zealand and Hungary, it is apparent that more detailed "exemption" guidelines are available.

India Inc has been clamouring for a rollback or partial relief from FBT based on the above. The budget proposals on FBT indicate only a modicum of relaxation providing hardly any succour.

Primarily, the changes on the FBT front are:

1. Levy of FBT on contributions to superannuation funds diluted as employer contributions to approved superannuation funds up to Rs 1,00,000 per employee now no longer attract FBT.

2. Valuation of fringe benefit for travelling expenditure reduced to 5% extended to all industries (this was earlier applicable only to pharma, computer software and construction sectors).

3. Shipping and airline companies to benefit as expenditure on "hotel, lodging and boarding" and "hospitality" will now be valued for FBT at 5%.

4. Pharma companies will not be subject to FBT on free samples of medicine/medical equipments to doctors; and

5. Payments to brand ambassadors will not be subject to FBT

The above amendments are effective only from the next year, which means India Inc would continue to bear the full brunt of FBT for the last year even on the above.

Trade circles feel if the objective was to rationalise the levy why has it not been given a retrospective effect, especially when proposals in favour of the taxmen are mooted with retrospective effect without batting an eyelid!

All in all, in the milieu strong fundamental and economic factors, rising profits, escalating bottomline and robust growth, India Inc will take the budget in its stride and surge ahead.

(Courtesy: Ernst & Young)