The Hindu Business Line : First, buy time

IN PARA 160 of his Budget speech, Mr Chidambaram explained the rationale behind the fringe benefit tax (FBT). The present system of taxing perquisites, he said, is not quite satisfactory. Many perquisites are disguised as fringe benefits and escape tax. Neither the employer nor the employee pays tax on those benefits. He has, therefore, proposed that where the benefits are usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer.

In proposing the FBT, the Government has taken recourse to the practice prevailing in countries such as Australia and New Zealand. Expenditure incurred by the employer is ostensibly for business purposes, but includes, in part, benefit of a personal nature. Perquisite taxation will continue in the hands of employees. Where attribution of the personal benefits poses problems, or it is not feasible to tax the benefits in the hands of the employee, FBT will be levied on the employer on such benefits provided or deemed to have been provided to the employees.

The definition of fringe benefits is wide and includes even reimbursements to employees and contributions to the superannuation fund. Contribution to this fund, scholarship to children of employees and tickets for private journeys will be valued as 100 per cent. Entertainment, employees' welfare, sales promotion, conferences and club facilities will be valued at 50 per cent. Telephone at 10 per cent, and conveyance, boarding and lodging at 20 per cent value will also be taken. On such valuation, FBT will be levied at 33.66 per cent.

One would have expected corporate houses to raise a furore about FBT. Inclusion of the superannuation contribution can lead to double taxation since such contributions are utilised for buying annuities on retirement and such annuity will suffer tax. The idea may stop private companies from making contributions to group superannuation schemes. LIC is holding a corpus of Rs 9,018 crores in group superannuation schemes.

Australia, which is cited as a model, excludes superannuation contributions from FBT.

FBT requires detailed accounts to be maintained. Civil contractors, transport operators and retail traders are at present taxed on a presumptive basis and there is a strong case for exempting them from FBT.

It is also necessary that there should be a threshold limit either by way of number of employees or minimum turnover for applying FBT.

An alternative proposal can be to limit the application of FBT to big companies to start with and levy tax on the basis of cost to the company less the perquisites taxed in the hands of employees.

One result of the levy can be the shifting of the tax to employees. Also, the annual increments of employees and the bargaining power of unions will be affected.

There are obvious incongruities in the way FBT has been conceived. Even loss-making companies before the BIFR will not be exempt. They are not even in a position to pay wages and salaries regularly. In respect of profit-making companies, FBT is not deductible or adjustable in the regular tax return.

The Bombay CA society has made a practical suggestion. "If the Government wants the employer to pay tax on common benefits given to employees, it can provide for disallowance of part of the expenses in the computation of total income under Section 37 of the I-T Act. This is the procedure adopted in USA and UK."

The suggestion for introducing FBT was first made by the Raja Chelliah Committee in 1992. The tax, introduced by the Finance Minister without debate, has a large sweep. According to the president of FICCI, it will raise the tax outgo of the corporate sector by at least 4-9 per cent.

One result of the proposed FBT would be that corporate houses might think twice before venturing to set up industrial townships. The tax should be thrown open for debate, and deferred by at least one year.

(The author is a former Chief Commissioner of Income-Tax.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Fair shift

White and well written

And say which grain will grow and which will not

On the right path to social regeneration

First, buy time

The criteria mania

Making search and seizure less taxing

F-16s on radar, let's re-count dollars