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Business News/ Politics / Policy/  TARC recommends government bring back fringe benefit tax
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TARC recommends government bring back fringe benefit tax

Commission also backs reintroducing banking cash transaction taxes and taxingfarmerswhoearn above Rs50 lakh a year

Parthasarathi Shome in his report says the introduction of FBT was a major step towards widening the tax base and bolstering direct tax collections. Photo: Pradeep Gaur/MintPremium
Parthasarathi Shome in his report says the introduction of FBT was a major step towards widening the tax base and bolstering direct tax collections. Photo: Pradeep Gaur/Mint

New Delhi: As finance minister Arun Jaitley scouts for ideas to expand the tax base and the source of government revenues ahead of the Union Budget in February, the Tax Administration Reform Commission (TARC) headed by economist Parthasarathi Shome has recommended that the government brings back the controversial fringe benefit tax (FBT) and the banking cash transaction taxes that were introduced and later withdrawn by the previous government.

The Shome committee in its third such report has also pitched for taxing large farmers with incomes above 50 lakh a year.

FBT, which taxes the perquisites provided by companies to their employees, was introduced as part of the Finance Act, 2005, as an additional income tax and came into force on 1 April 2005. However, it was withdrawn from assessment year (AY) 2010-11 after companies complained that it increased the compliance burden on employers.

Shome in his report says the introduction of FBT was a major step towards widening the tax base and bolstering direct tax collections. In fiscal year (FY) 2004-05, about 4,000 crore was collected under this head. However, legislators and government officials were kept out of the purview of FBT. “This violated the principle of horizontal equity since some taxpayers enjoyed these benefits without attracting levy of tax, while others had to pay tax," he added.

“A good tax that had the potential to reduce tax evasion and collected 6,000 crore annually in revenue had to be abolished due to lack of horizontal equity and commensurate pressure from powerful lobbies who paid FBT. Reintroducing FBT, without the distinction that had been made earlier by keeping specific sections out of its purview, 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," Shome said.

The banking cash transaction tax (BCTT) was introduced with effect from 1 June 2005, through the Finance Act, 2005, to track unaccounted-for money and trace its source and destination. BCTT was levied on cash withdrawals of more than 50,000 a day for an individual or Hindu undivided family (HUF) and 1 lakh for others from their bank accounts, other than savings accounts. It remained on the statute book for about four years and was withdrawn with effect from 1 April 2009. While withdrawing the levy, then finance minister Pranab Mukherjee had said in his budget speech: “BCTT has served a very useful purpose in enlarging the information system of the income tax department. Since the information is also being gathered through other instruments introduced in the last few years, I propose to withdraw this tax with effect from April 1 2009."

The commission said BCTT had enlarged the information system of the income tax department and that there was no other instrument at present by which such information was being captured. “With its withdrawal, an important source of information to monitor transactions of unaccounted money has dried up. The availability of information that was being collected through BCTT would certainly help the department widen the information base," the report added. The commission said BCTT can be reinstated as an effective administrative measure if not by amending the Income Tax Act.

The report said agricultural income of non-agriculturists is being increasingly used as a conduit to avoid tax and for laundering funds, resulting in the loss of crores of rupees in annual tax revenue. “A solution could be to tax large farmers. Against a tax-free limit of 5 lakh on agricultural income, farmers having a high agricultural income threshold, such as 50 lakh, could be taxed. This will keep small farmers out of the purview of taxation and yet close one escape route for black money," the commission said.

The commission said states could pass a resolution under Article 252 of the Constitution authorizing the centre to impose tax on agricultural income and all such taxes collected by the centre, net of collection costs, could be transferred to the states. “For this purpose, of course, an across-the-board political consensus needs to develop, and be followed by appropriate amendments, laws and collection procedures to ensure effective implementation of such an important change. Obviously, the TARC realizes that this is a fundamental structural reform proposition. Yet, successive governments have shown a lack of political will to tax agricultural income because of the politically strong hold that the agricultural lobby has over governments," it added.

Rahul Garg, leader of the direct tax practice at consulting firm PricewaterhouseCoopers, said that currently when the economy is going through a recovery phase, the government should not do anything to destabilize the process. “The most relevant tax reform at this juncture that the government needs to push for is goods and services tax (GST). To bring in an entire new tax concept at this point of time is not a great idea," he added.

As a last-ditch attempt to form a consensus that would enable the announcement of GST in the budget, finance minister Jaitley has called for a meeting of state finance ministers on 11 December. The government is looking to introduce the GST Bill in the current winter session of Parliament.

“We are yet to have consensus on three issues of inclusion/non-inclusion of petroleum products, entry tax and GST compensation funds and we are still having discussions with the states. The finance minister is meeting the state finance ministers on 11 December to iron out those differences and we are hopeful that with the final round of discussion with the states, we will be in a position to take a note to the cabinet and then finally introduce the Bill in the winter session before 24 December," Rashmi Verma, additional secretary (revenue), finance ministry, said at a conference on Tuesday.

Shome’s earlier recommendation of abolishing the post of revenue secretary, merging the direct and indirect tax divisions in the finance ministry were not well received by bureaucrats.

Shome, a tax expert who also headed a panel that constituted guidelines for General Anti-Avoidance Rules, was last year given the task of heading the commission to streamline the country’s tax administration.

It is not clear if the Bharatiya Janata Party-led National Democratic Alliance will accept the recommendations of the commission that was appointed by its predecessor, the Congress-led United Progressive Alliance.

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Published: 03 Dec 2014, 12:02 AM IST
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