The contours of the Budget plan are becoming clear. Finance minister Pranab Mukherjee?s team at North Block has already prepared to take on the most controversial direct tax of recent years, the fringe benefit tax (FBT).
The ministry is working on two alternatives?the withdrawal of the tax, or its partial roll back. The formulations that will be carefully considered by the minister in the next few weeks are the revenue implication of discontinuing the tax.
In a year when direct tax receipts grew at a mediocre 8.3% rate, FBT collections registered the highest growth at 12.38% to Rs 7,997 crore in 2008-09, against Rs 7,116 crore in the previous fiscal.
This incidentally is being seen as the regressive nature of the tax as it has not responded to the downturn in the profits of the companies.
As per the Budget estimate for 2009-10, the Centre?s direct tax receipts are estimated at Rs 3,79,576 crore, a mere 10% rise over the revised estimate of Rs 3,44,601 crore for 2008-09. Significantly, direct tax collections for the last fiscal were short of target by Rs 6,000 crore. The tax is regressive, as in an effort to soak up perquisites earned by employees of companies, levies it on a large range of business expenditure incurred by companies to run their operations.
Industry chambers have, therefore, been repeatedly asking for a rollback of the tax, introduced by former finance minister P Chidambaram in 2005. The industry demand is gaining momentum on account of the global financial crisis, which has significantly eroded corporate profitability because of the demand downturn.
?Ideally, the government should think of removing the whole scheme of FBT. But if that is not possible, then at least diluting it for certain industrial categories like exporting units would be a good move,?said Amitabh Singh, tax partner Ernst and Young.
Commerce and industry ministry in its Budget 2009-10 wishlist too has asked for withdrawal of FBT for exporters. Mukherjee, who is keen to simply the country?s tax regime would find the FBT as a major irritant in the tax system.
Another tax analyst however argued that tweaking the corporate tax rate may help fulfil the government?s motive of achieving its collection targets.
?FBT should be withdrawn as it is not only a tax on genuine business expenditure, but it also involves a lot of additional paperwork,? he said on conditions of anonymity.
?(Starting today, FE begins a series on some of the major issues that will dominate Pranab Mukherjee?s Budget)