Legislation raising the salary cap for payroll tax and providing tax relief for retail stores was passed by the House of Assembly last night.

Finance Minister Paula Cox raised the amount of salary on which high earners pay payroll tax from the first $350,000 to $750,000.

The news first announced in Friday's Budget caused considerable unease in the international business community, according to some sources.

Retired corporate lawyer Kevin Comeau told this newspaper that it could cause some firms to leave or scale down their operations. He mooted the idea that there could also be legal challenges.

However, Ms Cox defended the move as she introduced the legislation last night. She told the House of Assembly: "The salary cap provides, in effect, an exemption on the payment of payroll tax for that portion of remuneration that exceeds the salary cap.

"This differential needed to be addressed as the real effect of the salary ceiling for payroll tax purposes is that those whose remuneration is less than the cap are paying payroll tax on their entire salary with no corresponding exemption or reduction in their payroll tax bill, unlike the position for those in the higher salary bands."

She added: "The increase in the salary cap has been increased to capture a fair contribution from those who receive higher incomes. Most, if not all, of the persons who benefit from the salary cap work in leading sectors of the economy and therefore are positioned to contribute their fair share of taxes without undue impact to profitability, shareholder value or partnership distributions.

"Government has tried to be balanced and fair, taking into consideration the situation that we must face as our economy transitions to a path to economic recovery."

The payroll tax represents a major revenue source for Government. The Ministry of Finance projects that the proposed change will contribute an additional $15-$20 million towards a total yield of $427 million in 2010/11.

Ms Cox said: "There is no question that the demand for Government services is increasing and the proposed change in the cap will assist in providing the additional revenue that is required to satisfy the expanding public needs of our community."

Outlining the tax relief for retail stores, Ms Cox explained that stores with an annual payroll of more than $200,000 will be subjected to an adjusted tax rate. It is not available to businesses that benefit from relief for businesses situated in the Economic Empowerment Zone.

She noted: "The Government is very much aware of the pressure on the commercial sector and in this regard has provided this relief."

She also told the House: "There have been other comments in the media recently by some observers who claim that Bermuda's tax system places major burdens on small businesses. It must be emphasised that over the past several years Government has restructured payroll tax to reduce its burden on small and medium-sized businesses, and reduced some rates of customs duty to give incentives to small businesses. Indeed this Bill provides a further reduction in the National Budget 2010/2011 for small businesses. To that end, a payroll tax concession will be established for retail stores for the months of January, February and March, recognising that this is slower period for retail.

"Relief has been given to taxi drivers and will take the form of a rebate. Fuel concessions will be given to commercial fishermen for an additional year until the end of March 2012. Following consultation with the retail sector, custom duty has been reduced on a number of consumer electronic items including televisions.

"Concessions given to the hotel sector and the restaurant sector have been continued. The extension will provide additional financial relief to these sectors and assist them in financing ongoing refurbishment schemes."

Shadow Minister of Finance E.T (Bob) Richards said: 'I think that the Minister is probably well intentioned with trying to help out the retail sector, which as we know has been in a great deal of difficulty for a great deal of time. However, I don't think it's enough. Representatives of the sector have been disappointed that this is the only concession that the Government has made towards helping them out. It remains to be seen how many of these businesses are going to make it through, and I think the Minister could probably have done more for them."

His party colleague Pat Gordon-Pamplin criticised the payroll tax cap leap from $350,000 to $750,000 saying it was too big an increase in one go.

The legislation was passed despite the concerns of the Opposition.