The Hindu Business Line : The legal challenge to FBT

"The levying of FBT amounts to double taxation as already the new Chapter does not allow the FBT tax as a deductible expenditure," states the petition.

Chennai , Sept. 10

IT has been customary that any new tax has to pass through the trial by fire of challenge before the courts. Accordingly, what's currently hot is FBT or the `Fringe Benefit Tax' introduced in the Income-Tax Act through the 2005 Budget.

And on Saturday, the Madras High Court admitted a writ petition filed to challenge the constitutional validity of the new Chapter XII-H on FBT and also granted interim stay.

Interestingly, the petitioner is Kumbhat & Co, a firm of chartered accountants, represented by its partner Mr Ashok Kumbhat, a past president of the Institute of Chartered Accountants of India.

More than a score grounds have been argued in the petition, beginning with the charge that the provisions are violative of the following Articles of the of the Constitution of India: Article 14 (Equality before law), Article 19(1)(g) (Right to Freedom - to practise any profession, or to carry on any occupation, trade or business) and Article 265 (No tax shall be levied or collected except by authority of law).

"The levying of FBT amounts to double taxation as already the new Chapter does not allow the FBT tax as a deductible expenditure," states the petition.

It also questions how the FBT can discriminate between different categories of employers, and, thus, violate the spirit of Article 14.

The new tax falls on loss-making concerns too, and, therefore, is arbitrary and unreasonable, contends the firm. The petition foresees the tax to pose a threat to the small-scale sector since no threshold limit has been prescribed. "Further, there is no basis to levy FBT at the ad hoc rate of 5 per cent in respect of pharmaceutical, computer software and construction industries as against 20 per cent for others," reads the petition.

That FBT is an expenditure tax without any role in a direct taxes enactment is another ground listed in the petition. "This levy is termed as a presumptive tax and leaves no discretion to the authorities administrating the Income-Tax Act, 1961. The amount of paper work involved to maintain the records, filing of returns etc., will make the entire exercise a counter-productive one. The cost of administration would be even more than the levy," argues the CA firm.

Mr V.S. Jayakumar, advocate representing the petitioner, is of the view that FBT is opposed to the basic concept of income-tax law.

"It has been introduced without any rationale. The idea has been simply borrowed from other countries."

One may remember that the Finance Minister had said in his Budget Speech, "I have looked into the present system of taxing perquisites and I have found that many perquisites are disguised as fringe benefits, and escape tax."

He, then, announced, "I now propose 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."

Sources say that another firm also has filed a petition similar to that of Kumbhat & Co.

These are close on the heels of court battles in Andhra Pradesh. Experts opine that in the guise of FBT, genuine business expenditure too, has the potential to get taxed.

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