The Hindu Business Line : FBT merits further study

WHY is India Inc viewing fringe benefit tax (FBT) with suspicion? It is claimed that FBT was introduced because tax authorities were unable to identify group benefits enjoyed by employees in the private sector. FBT, in its current dispensation, has its roots in the Australian and Kiwi models. But these models are employee oriented and limited to benefits not enjoyed by workers on individual basis. But the taxation on "business promotion" expenses clearly establishes that FBT looks far beyond employee benefits. How can business promotion be a fringe benefit for the employee?

Fiscal policy must promote savings and induce entrepreneurial activities. One of the basic principles of taxation is to have a cost efficient tax collection system. Does this cannon hold good for FBT?

At present, India Inc pays advance tax on June 15, September 15, December 15 and March 15. And FBT is to be paid on July 15, October 15, January 15 and March 15, with the last instalment being based on estimates. As a result, the advance tax calculation exercise on the part of the corporate taxpayer has doubled. A taxpayer with several branches will have to undertake consolidation exercise almost every two months. Also, the cost of administering this tax and the paperwork involved for the I-T Department are bound to go up. Instead, if a 5-6 per cent tax is levied at the time of final assessment on certain fringe benefit oriented transactions, much productive man-hours can be saved. Cannot the tax administration be made simple?

The first major victim of FBT is the superannuation subscription by employers on behalf of employees. Retirement pension is one of the most important social welfare measures. India is not in the same league as its Western counterparts that provide unemployment benefits to deserving citizens. Hence, FBT would discourage privately sponsored social security schemes.

It would not be out of place to record the reaction of one of the businessman in the US as quoted by the Kemp Commission: "The tax system has grown into a monstrous predator that kills incentive, swallows time and chokes the hopes and dreams of many."

FBT, one believes, was introduced after much discussion and study. Yet, the CBDT was not able to come out in time with a Circular explaining the scope and applicability of the intended legislation. Some of the consequences of FBT are:

* It can be levied on even small charities/religious institutions that do not consider registration necessary;

* Even genuine business expenses wholly laid out and expended in the course of business — business travel, for instance. — could get taxed. If it were true that people derive personal benefits on travel, the Government should have thought of a mechanism of taxing government employees and touring Parliamentarians, as they also enjoy the same benefits;

* Employers abroad who depute their employees there (airlines, shipping companies, and so on) would be covered by the levy;

* Even hospitals run by employers at remote locations are covered by the levy. Is the paltry collection of 6.73 per cent on the count more important than the well-being of the working class?

* The tax would extend to employers in regard to expenditure on employees whose income is not taxable in India at all — for example, employees working abroad in foreign branches.

Tax reform does not necessarily mean introducing additional pieces of legislation to levy new taxes. What it has to usher in is a cost-efficient tax administration and a clear and well-laid-out law for taxpayers.

Introduction of additional taxes such as FBT would go to make domestically produced goods costlier and less competitive. Many countries in Asean are yet to embrace FBT. A non-partisan study of the taxation system in Asean, including China, is a sine quo non for effective tax reform.

(The authors are chartered accountants.)

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