The Hindu Business Line : Dragged beyond imagination

FRINGE benefit tax (FBT) is, probably, one of the most confusing taxes in the Income-Tax Act, 1961. Explaining the rationale of FBT, the Finance Minister, Mr P. Chidambaram, in his Budget speech (para 160), said that this tax would be leviable "where benefits usually enjoyed collectively by the employees and cannot be attributed to individual employees, they shall be taxed in the hands of the employer."

The concept of benefit to employees is also brought out in Section 115WB(a), where fringe benefit (FB) is defined as "any privilege, service, facility or amenity directly or indirectly provided by an employer, whether by way of reimbursement or otherwise to his employees (including former employee or employees)".

But the attribute of `collective enjoyment' is given a go-by in clauses (b) and (c) of Section 115WB, with i) cost of concessional tickets to employees; and ii) contributions to superannuation funds getting included in the definition of FB.

The basic attribute of FBT — that is, `benefit to employees' — has been diluted in clause (2) of Section 115WB, which defines "deemed benefits" to include expenditure, which has nothing to do with the employees and benefits to them. Some examples of these are given in the replies to various questions in CBDT's Circular No. 8 of August 29, 2005. These are:

Situation 1: Company incurs expenditure on travel, hotel, and so on, wholly and exclusively for an assignment, which is reimbursed by its client. Still, the company will have to pay FBT on such reimbursed expenditure. This is illogical. Further, no employee benefit is involved in this expenditure.

Situation 2: A company spends money for conference(s) for agents, dealers, development officers/advisors, and so on. In such conferences there may be no employees involved, but still the company organising them will have to pay FBT on the expenditure incurred.

Situation 3: The business organisation incurs expenditure on hospitality for customers to maintain cordial relations with them. No employees are involved in the benefit conferred. Yet, the business entity will have to pay FBT on such expenditure.

Situation 4: Expenditure on advertisement is exempt from FBT. But expenditure on `brand', `brand ambassador' or `celebrity' endorsement will be liable to FBT even when no benefit to any employee collectively is given and even when such expenses, too, concern advertisement.

Situation 5: Expenditure on distribution of free medical or other product samples are liable to FBT. But no explanation is given for this. The basic issue is whether such expenses can be taxed as fringe benefit when these are i) business expenses; and ii) not incurred for the collective benefit of employees.

The concept of FBT has been dragged beyond imagination.

Another justification

Mr Parthasarathi Shome, advisor to the Finance Minister, has said that the rationale behind FBT is to ensure efficiency of resource allocation by taxing all factors of production equitably. How this would be done has, however, not elaborated upon.

The incidence of taxes in the case of competitive economies affects prices and output in the long run. Obviously, imposing FBT on factors of production will affect economic efficiency. Further, all the factors of production are being taxed independently either through land revenue laws, excise, Customs and income-tax (on profits and gains as also on the salaries of skilled and unskilled labour).

There is, therefore, no justification in taxing business expenditure in the guise of FBT.

Giving odd and sundry explanations to justify the tax merely erodes the credibility of the Government and leads to confusion in the minds of taxpayers and the tax administration.

(The author is a former chairman of CBDT.)

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