Due to the effect of the FBT many companies started tightening the screws on the benefits given to the employees. Sometimes reasonable and sometimes highly unreasonable! In many professions especially like sales and marketing where the employees are motivated to work at lower salaries because the benefits made up for a lower salary, the hurt was very apparent. Another view against the FBT has been that it is a very complicated taxation model and also leads to taxation of certain components which can be directly attributed to individual employees.
The economic survey 2008-09 calls for reversal of the different fancy taxes imposed during the last decade. This includes the Securities Transaction Tax (STT), the proposed Commodities Transaction Tax (CTT, Dividend Distribution Tax and the Fringe Benefit Tax)
Will the Finance Minister take note or ignore them is an issue that will have to wait till 06 July 2009, but, let’s get an idea of how It could spell happy news for the millions of Indian Investors.
“Tax policy initiatives since the economic reforms of the 1990s have helped in considerably simplifying the tax system and broadening the base. Within this broad trend there have been occasions when revenue imperatives have led to the imposition of surcharges and cesses and a number of new taxes such as CTT, STT, FBT and DDT, which have partly reversed the move towards a simpler system”
-Section 47 | The Economic Survey 2008-09 | Chapter 2
The STT and you
The Securities transaction tax was introduced by Mr. Chidambaram in 2004 to tax investors on the value of security transactions. Securities are defined to include Stocks, Shares, Bonds, Debentures, Derivatives and other marketable securities including ones issued by the Government.
STT is applicable on all transactions happening through recognised stock exchanges in India. The rates at which the transactions are charged vary from 0.017% to 0.125% of the turnover in case of Shares and Futures. In the case of Options it is 0.017 of Premium paid by the seller; in case option is exercised it is at 0.125% of settlement price and paid by seller. #
What happens if STT is abolished?
From a personal finance point of view it means that you can save up to 0.125% of the value of your share purchase and sale transactions. A very small amount of saving (Rs 6250 if our turnover is 50 L in one year!)! From the Economy perspective the exchequer could be burdened with a huge loss of income. (Rs 5408 crores is the income from STT for the last year**). This could lead to reduced expenditure on development projects. This argument probably looks like being in favor of continuing with STT, but, then do remember the whole idea is to simplify the taxation process!
Dividend Distribution Tax
The DDT is taxed at 15% of the dividend declared by the company. But it spares the receiver of the dividend and instead is taxed at the hands of the dividend payer-the company.
The arguments against the DDT have been that it is a double taxation concept. Since most companies pay dividend out of the profits and very rarely out of the surplus, they are taxed twice. Once, at 33.6% as part of income tax payable on the profits and secondly, @15% as DDT.
Personal finance point of view:
Although the taxation is at the company’s hands we need to understand that it is our income which is reduced as part of the DDT. As a share holder you are entitled to a share in the profits in the form of dividend. But before it reaches you the government deducts its share (15% of your dividend). Although for a small share holder the amount might seem very small, in case of promoters/large shareholders the burden is considerably huge. And especially considering that you are paying tax on the same income twice, it seems cruel.
Fringe Benefit Tax
The FBT was introduced in 2005 to be implemented @30% on the various “fringe benefits” that companies provided their employees. The quantum on which this 30% is being charged varies from 5% of the expenditure deemed to be fringe benefit (hotel boarding, conveyance tour and travel) to even 100% of expenditure deemed fringe benefit (tickets provided to employees for personal travel)
Personal finance point of view:
Due to the effect of the FBT many companies started tightening the screws on the benefits given to the employees. Sometimes reasonable and sometimes highly unreasonable! In many professions especially like sales and marketing where the employees are motivated to work at lower salaries because the benefits made up for a lower salary, the hurt was very apparent. Another view against the FBT has been that it is a very complicated taxation model and also leads to taxation of certain components which can be directly attributed to individual employees.
What happens if FBT goes?
For companies it would be a great relief both in terms of cash savings and also time and resources needed to compute and manage FBT. For the exchequer it could mean a loss of Rs 7997 crores** (FBT collection for 2008-09).
CTT (Commodities Transaction Tax) #
Although the Commodities Transaction Tax has not yet been implemented, there have been voices in the past and more vehemently now against making it a law. The CTT is to be taxed on commodity transactions entered in a recognised association (mainly commodity exchanges).
It could be a blow to the young and nascent commodities market in India. Also not many salaried professionals/small savers are part of the commodities market and hence CTT could be a deterrent from them entering. The other aspect against CTT is that it could lead to price hikes as we are moving towards a stage where commodity markets will be the benchmark for price fixation if not already.
The Last word
Although the verdict will only be known on 06 July 2009, it can be clearly seen from the above arguments that its time the Finance Ministry abolishes the fancy and unorthodox taxes.
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These taxes are against the spirit of simplifying the taxation process
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The FBT and STT together gave the exchequer Rs 13405 crores which is lesser than 4% of the total revenue of Rs 338,212 crores. Is it worth the cost and the administration?
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Any amount lost by individual investors, however small, is a loss. This should not be a demotivating factor for them to enter the markets. Only when large numbers of small informed investors play a role will the markets show some stability.
Over to you Mr. Finance Minister…
References:
*** http://www.incometaxindia.gov.in/archive/CBDTPressRelease_22052009.pdf
# (Page number42-44- http://www.incometaxindia.gov.in/archive/ExplCircularforwebsite_30032009.pdf)
Tax laws in India are unnecessarily clumsy and cumbesome. Mnay a times they are vague. The language used in tax laws is highly complicated. Those who draft these laws should be training in business communication.