New Delhi, May 2: Finance minister P. Chidambaram today capitulated on his most innovative tax proposals in the budget by diluting the controversial fringe benefit tax on companies, waiving the transaction tax on cash withdrawals from savings bank accounts, and raising income-tax exemption limits for senior citizens and women.
Responding to the debate on the finance bill 2005, which was later passed by the Lok Sabha, Chidambaram said he was raising the threshold for the banking cash transaction tax to Rs 25,000 for individuals and Rs 1 lakh for companies operating current accounts. The tax comes into effect on June 1.
He raised the tax exemption limit for women to Rs 1.35 lakh from Rs 1.25 lakh proposed in the budget. The exemption ceiling for senior citizens has been increased to Rs 1.85 lakh from Rs 1.5 lakh.
Despite pleas from Opposition benches, the finance minister refused to revisit the withdrawal of standard deduction ' a tax break that has traditionally been extended to salaried persons.
The fringe benefit tax was one of the most controversial imposts in the budget and had sparked howls of protest from business.
Chidambaram appeared to give in somewhat by waiving it on expenditure on sales promotion and publicity. In 16 other categories of expenditure, he rejigged some rates even as he doled out a few tax breaks to infotech, pharmaceutical, transport, construction, hotel and aviation companies.
Computer software and pharmaceutical companies will have to pay 30 per cent fringe benefit tax on just 5 per cent of the expenditure they incur when they send their employees out on both overseas and domestic trips.
Aviation companies will not have to pay the tax on the expenditure they incur on repairing and maintaining their planes; while hotels will have to pay the tax on just 5 per cent of their business expenditure on hospitality.
Companies will now have to pay the tax on 20 per cent of the expenditure they incur on entertainment, hospitality, guesthouses and employee welfare. Earlier, this had been put at 50 per cent.
But what he gave with one hand, the finance minister took away with the other. He brought within the ambit of the fringe benefit tax all expenses incurred by an employer on the provision of food and beverages or food coupons to his employees.
At the same time, the minister raised the fringe benefit value of telephone and mobile phone use from 10 to 20 per cent of the actual bills. There are nearly 30 million telephone and mobile connections used by companies and these will now fall in the ambit of this tax.
Businesses will have to pay 6 per cent fringe benefit tax on their telephone bills on top of the service tax all telephone users pay.
Not pleased with today's changes, companies intend to press for another review.
"The continuation of the fringe benefit tax at 30 per cent will adversely affect the competitiveness of the corporate sector. The tax on contributions to approved superannuation funds, expenditure on food or beverages provided to employees in office or factories, conveyance, tour and travel needs to be reviewed," said Onkar S. Kanwar, president of Ficci.
Chidambaram justified the cash transaction tax by arguing that it would help establish a tax trail. He said the Reserve Bank had unearthed several instances where individuals had withdrawn as much as Rs 600 crore in cash over two months from their bank account.
'We want to push the economy towards the use of cheque books, credit and debit cards,' he said. 'It is naive to believe that transactions in the banking industry are above board; in fact, the banking system is used to launder black money.'
However, critics said the tax could be challenged in courts of law as it amounted to double taxation. Said financial analyst Sudatto Sen: 'The fact remains that a man will be taxed twice: once when he earns money and again when he withdraws it to spend it.'
Critics also pointed out that banking transactions above Rs 50,000 have to quote income-tax identification numbers and cash transactions above Rs 10 lakh have to be reported by bankers to the Reserve Bank.
Chidambaram also extended the 7 per cent customs duty on laptops to all other computer imports, including monitors and central processing units, while exempting components meant for making mobile phones in India from paying a 4 per cent countervailing duty.
See Business Telegraph