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Fringe Benefit Tax is a welcome change: B S R and Co

Published on Mon, Jul 06, 2009 at 16:53 | Source : Moneycontrol.com

Updated at Mon, Jul 06, 2009 at 17:04

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Fringe Benefit Tax is a welcome change: B S R and Co

Parizad Sirwalla, Partner - Tax, B S R and Co

Personal Tax Changes

Individual assessees had tremendous expectations from the new Government in Budget 2009. The Finance Minister (FM) has made some changes to the existing individual taxes.

The annual minimum amount not taxable has been marginally increased by Rs.10,000 i.e. from Rs 150,000 to Rs. 1,60,000. Corresponding for females this limit has increased from Rs 180,000 to Rs 190,000. For senior citizens, the amounts have increased by Rs 15,000 i.e. from Rs 225,000 to Rs 240,000. The good news is that 10% surcharge on income above Rs 10,00,000 has been removed. However, the education cess remains. While there was some lobbying to reduce the top tax rate, the peak rate of 30% is unchanged. With surcharge being abolished, the maximum effective tax rate is now 30.9% as against 33.99%.

However, this translates into an annual benefit of Rs 1030 for an individual earning income below Rs.10, 00,000. Interestingly, a person with income above Rs.10,00,000 will save comparatively much more. For eg. the disposable income will increase by Rs 37,595 for an income level of Rs 15,00,000.

Currently, an individual was liable to pay advance tax in three quarterly instalments on non-salary income, if the annual tax payable exceeds Rs 5000. Now the advance tax has to be discharged only if the estimated tax exceeds Rs.10,000.

Wealthy taxpayers owning specified assets, get a relief as the wealth tax exemption limit of Rs 15,00,000 has been doubled to Rs 30,00,000 after a 17 year gap.

With the objective of developing the country's human capital, it is proposed to extend the scope of deduction for interest on education loans availed. Under the existing provisions, the deduction is available only if the student pursues full time studies for any graduate or post-graduate courses in specified fields. It is now proposed to cover all fields of studies including vocational studies pursued after schooling.

The most welcome change is the complete removal of the Fringe Benefit Tax (FBT). As the FBT provisions were felt to be too onerous and generated a huge administrative burden on corporates, there was a pressure to abolish the same. With this change, the earlier system of taxing the benefits in the hands of the employees is proposed to be restored.

FBT was also levied on employee stock options (ESOP) granted by an employer to an employee. Subsequent to this levy, ESOPs which were one of the best tools to attract and retain talent had lost its sheen. As ESOPs related to individual benefits, there was intense lobbying by corporates on this levy which was a tax imposed at the employer level. With the complete removal of FBT in this budget, ESOPs are proposed to be taxed in the hands of individuals. It is interesting to note that pre-FBT regime; ESOPs were exempt from tax if they met with the Central Government guidelines.

While, the FM has not altered the current Exempt-Exempt-Tax (EET) regime on the New Pension Scheme (NPS), it has extended the tax relief to individual businessman, earlier available only to salaried individuals. However the NPS is still not at par with other savings schemes like the Provident Fund, PPF etc which are completely tax-free.

Any gift of a property in certain specified cases will also now attract income tax in the hands of the recipient. Earlier this was restricted only to cash sums.

After all this, one also needs to await the draft of the new tax code which will be open to discussions shortly. It remains to be seen what final shape that would take.