The Hindu Business Line : Behind the fig leaf of fringe benefit

Parenthetically it may be pointed out that with the lowering of depreciation rates to almost accord with the book-rate of depreciation, the bottom has been knocked out of the invidious MAT (minimum alternative tax) that ordains companies to cough up at least 7.5 per cent as tax on book profits.

What however has raised the hackles of the corporate sector the most is the ushering in of fringe benefit tax. This tax is nothing new though. It has been in vogue in several countries. Even in our own country it had been there sans a name or title. The commercial world and the tax department had a picturesque word to describe it - disallowances.

Only its sweep is sought to be extended now to include a large number of expenses, which have hitherto been passing muster as wholly and exclusively incurred for business.

Indeed, the Finance Minister seems to have touched a raw nerve by fluttering the dovecots of the companies and its executives. He has been in the doghouse for, in effect, hiking the tax rate through back door through two devices.

First, the steep increase in surcharge from 2.5 per cent to 10 per cent effectively makes the tax rate 33 per cent. In the event, there is only a marginal reduction in the corporate tax rate. There is considerable truth in this charge.

Surcharge has now become an abiding part of our tax edifice, added as it is on one pretext or the other by successive budgets to the main and substantive tax. That it refuses to fade away is indeed a cause for concern because by definition surcharge is meant to tide over a temporary difficulty.

Second, the fringe benefit tax, allegedly, would jack up the effective tax rate, as does its close cousin the distribution tax with which it bears an uncanny resemblance in design and operation.

But a dispassionate analysis of the entire new scheme would reveal that the Finance Minister has struck a fine balance between business interest, equity and revenue considerations while introducing fringe benefit tax.

It is not the communists alone who have been baying for industrialists' blood. Every right thinking person who is aware of the real meaning and implications of what is felicitously described as company expense account is concerned about the gross self-aggrandisement that goes on the in the rarefied corporate world.

How can the Revenue remain a mute spectator to the corporate shenanigans and depredations?

Not long ago, the whole country was scandalized witnessing the shameless spectacle of a liquor baron and his assorted cronies and chums boarding the company's jet with singular nonchalance to South Africa to witness the world cup cricket. Can anyone in his senses accept that the related expenditure was for the benefit of the company?

What the Finance Minister has done is to disallow 20 per cent of expenses on maintaining and running company's aircraft by imposing a 30 per cent fringe benefit tax — which corresponds to the corporate tax rate of 30 per cent — on 20 per cent of such expenditure. Is this unreasonable? If anything, he has been magnanimous.

There is no reason why the assessing officer (AO) should not be vested with the power to go into the question of personal vis-à-vis the business portion of any expenditure.

But the Finance Minister has had the vision to foresee the hair-splitting and corrupting potential of such a discretionary power and settle for a lesser tax. He has once again been reasonable by imposing the fringe benefit tax on only 50 per cent entertainment, festival, gifts and club expenses in the face of the fact that often the personal element admittedly is much more on such expenses.

He has been the embodiment of reason while proposing to impose fringe benefit tax only on 10 per cent of telephone expenditure of a business given the fact that much more is actually on personal account.

Once again he has erred in favour of the corporates to prevent hair-splitting and the resultant prolonged and vexatious litigation.

There cannot be any serious dispute on the issue of imposing fringe benefit tax on scholarship. Thanks to the indulgence shown by courts many intrepid companies have been giving sumptuous scholarships to children of employees exposing neither the employees nor their children to tax on this account.

The fig leaf of eligibility criteria justified this charade. The Finance Minister has rightly brought this under the tax net. It would have been more appropriate had this been added to the taxable income of the employee because in this case there is no problem of establishing a back-to-back relationship between the expenditure and its beneficiary.

Be that as it may, the fringe benefit tax would at least have a sobering effect on companies. Tax on 20 per cent of travel, including foreign travel expenditure, once again is entirely justified, as there is a considerable personal element built into the travel allowances of executives. What perhaps is not justified is the imposition of fringe benefit tax on 50 per cent of expenditure on sales promotion and publicity.

The Finance Minister would do well to have a relook on this aspect. By no stretch of imagination is there a personal element in such expenditure.

It is another matter that they may be branded wasteful by some. But whether to splurge or not should be left to the good conscience of individual companies. At any rate, this seems to be the odd man out inasmuch as all others have a common thread running through them - personal expenditure in part.

He has arguably fallen into the communist's trap by clamping down on what they perceive to be wasteful.

(The author is a Delhi-based chartered accountant.)

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