The Hindu Business Line : Disguised expenditure tax

A cursory glance at the FBT scheme reveals that it goes far beyond its ostensible rationale, striking at expenses that do not have even a remote connection with employees.

S. Murlidharan

Several committees, notably the L. K. Jha Committee of the yore and other financial experts in India, have in the past recommended wholesale switching over to expenditure tax from the extant income-tax.

Successive governments at the Centre however have preferred not to rock the boat by making this paradigm change in our tax system perhaps in deference to the difficulties in its implementation and also out of fear of unwittingly stepping on the toes o f the not so well-heeled section of society. Be that as it may, but the Finance Act, 2005 introduced expenditure tax in a big way, arguably disguised though as Fringe Benefit Tax (FBT).

To be sure, the ostensible aim of FBT, as apparent from the Finance Minister’s speech in Budget 2005, was to bring into the tax net a lot of benefits enjoyed by employees at the expense of the employer hitherto either not taxed or defying precise pigeonholing in terms of who-enjoyed-how-much so as to be taxed in the hands of the individual beneficiaries.

But a cursory glance at the FBT scheme reveals that it goes far beyond its ostensible rationale to strike at expenses that do not have even a remote connection with employees. It targets ‘sales promotion’ which by no stretch of imagination can be considered to be benefiting any employee, thus fuelling the suspicion that FBT has a deeper intent than meets the eye.

Apparently, expenses on advertising were perceived to be ostentatious though there has been a subsequent climb-down by letting off a whole lot of advertising expenses off the FBT hook. The climb-down incidentally leaves a lot to be desired — to wit, payments to celebrities endorsing a product are not subjected to FBT but the payments to lesser mortals are.

Similarly, entertainment expenses can benefit employees only tangentially. Yet 20 per cent thereof is deemed not to be for business purposes. Targeting as much as 50 per cent of expenses on gifts for FBT also reinforces the view that bringing into the tax net hitherto untaxed benefits enjoyed by employees was only the proverbial thin edge of wedge with the real motive being to strike at ostentation and extravagance.

Personal expenses

The omnibus Section 37 (1) under which most of the expenses are claimed by businesses frowns upon personal expenses of the assessee. But then a company has neither a body to be kicked nor a soul to be damned so much so that while personal expenses of a sole proprietor would clearly stand out for disallowance but not the binge indulged in by honchos and their blue-eyed boys.

Perhaps this came in the way of disallowing expenses incurred by a company not benefiting it wholly or substantially but benefiting substantially its employees, especially those at the top and their hangers-on.

This handicap could have been overcome through a specific amendment to Section 37. That this direct and more equitable course has not been followed is revealing in more ways than one.

First, it shows that the tax officials have been cosseted from the burden of unearthing such expenses inuring for the benefit of individuals rather than for the organisation.

It is for employers to instead offer for FBT a part of the targeted expenses peremptorily deemed to be inuring for the benefit of individuals rather than for the organisation.

Hence 20 per cent of conveyance expense of, say, Rs 10 crore incurred by a company is generally deemed to be inuring for the benefit of individuals warranting a payment of FBT of 34 per cent approximately thereon, which works out to Rs 68 lakh.

Loss-making companies

Second, the peremptory presumption as to how much inures for individual benefits would not have hurt loss-making companies had the riposte been disallowance. That it is a separate tax in the form of FBT is what rankles such companies.

To wit, suppose, the loss is Rs 2,000 crore and the expenses targeted for FBT aggregate to, say, Rs 500 crore. Under the disallowance regime, the loss at best would stand reduced to Rs 1,500 crore with the company not having to cough up any tax still. But under FBT, tax of Rs 170 crore has to be paid.

This is the unkindest cut of FBT, smacking of expenditure tax. This also smacks of subterfuge. That its powerful tentacles can garner a lot of revenue is evident from the fact that in 2007-8, it is reported to have yielded Rs 6,808 crore as against the collections by way of corporate tax of Rs 1,08,401 crore. It would be instructive to know how much of this came from companies otherwise not required to pay income-tax.

(The author is a Delhi-based chartered accountant. blfeedback@thehindu.co.in)