The Hindu Business Line : The rights and wrongs of FBT

THE common belief is that tax evasion is practised on a large scale in business and profession, while salary earners have recourse to tax avoidance to the extent practicable. It has been the fashion to decry evasion and extol avoidance — the former for breaking the law and the latter for skirting it. The Finance Minister, Mr P. Chidambaram, is to be congratulated for his efforts to deal with both — the former through the banking cash transaction tax and the latter through the fringe benefit tax (FBT).

But do the new provisions governing FBT carry conviction? Will they serve their purpose? To what extent are the discontent and fears voiced in the media justified? How best can the Finance Minister mitigate or obviate them?

An avoidable levy

Fringe benefits not covered by Section 17 have, in fact, been escaping tax altogether, being deducted as business expenditure in the computation of the employer's income from business.

The fact that tax has been so avoided is not a recent discovery. It was a natural corollary to Section 17 in the absence of a countervailing measure. It was not, therefore, necessary to fall back on the Australian model of the `FBT' to tackle something which could have been scotched by amending Section 17, 37, 40 or 40A or inserting a new section in Part D of Chapter IV .

In one breath the Finance Minister has been speaking of the simplification of the existing income-tax proceedings even while adding to them merrily. In the circumstances, the Australian model of FBT, which has been ostensibly followed, has eventuated as the Sisyphean model of endless, useless, monotonous and expensively repetitive toil.

The Finance Minister is reported to have remarked, tongue-in-cheek, that some of the criticisms of the new levy were attributable to the fact that most people who read the Finance Bill were not lawyers and, therefore, did not understand the provisions adding, however, that he was not blaming them for this. In fact, the deficiency of these provisions is that they are incomprehensible to those for whom they are meant and consequently the beneficiaries will be lawyers.

Hosts of tax consultants, including chartered accountants, lawyers and superannuated civil servants, are already engaged in adding to the confusion. It has been reported that a writ petition has been filed before the Andhra Pradesh High Court challenging the new levy on the ground that it constituted a tax on expenditure, on which the Central Government should not have embarked without the concurrence of the State Government since any unilateral action by it was beyond its legislative competence.

The object of the levy could have been achieved without creating so much sensation and wasting so much time and money without any commensurate advantage to anyone. A straightforward fixed or flat deduction of tax from the estimated/statutorily presumed fringe benefit (FB) component of the expenditure incurred by the employer could have served to steer clear of all the current controversy. Such deduction would have been a deterrent or a disincentive to collective conferment of FB and encouraged transparency and better tax compliance.

FB, a tax on expenditure?

Whatever the legal interpretation of the levy, FB does not purport to be a tax on the expenditure incurred by an employer either on his own account or on behalf of the employee concerned. It is like a tax deducted at source from any perquisite within the meaning of Section 17 enjoyed by an employee.

The fact that its value cannot be precisely quantified with reference to any particular employee would only justify a statutory presumption or attribution of the benefits jointly enjoyed by him with all the other employees concerned. An employer cannot frustrate its subjection to tax by expressing inability to provide it separately to each employee, or accounting for it individually, employee-wise.

In any case, there is nothing to prevent the Legislature authorising the Revenue to make a rough and ready estimate of the presumptive income and assessing it to tax in the hands of the employee by suitable amendment to Section 17 or inserting a new Section 17A enabling such assessment. Any litigation on this issue will turn out to be an exercise in futility.

The amendment proposed can clarify that any expenditure resulting in a perquisite or benefit to an employee will be liable to inclusion in his salary on the basis of its apportionment by the assessing officer dealing with the company's assessment and tax may be deducted at source from the income at any flat rate that may be prescribed in the Finance Act as in the case of any of the benefits for which Section 17 provides.

Expenditure tax, as commonly understood, is a tax on personal expenditure, not a tax on business expenditure. By no stretch of imagination can the cost of amenities or perquisites enjoyed by an employee be treated as personal expenditure incurred by an employer, that is, expenditure not relatable to the employer's profession or business but borne for his own enjoyment or meeting his non-professional/non-business liabilities/commitments.

The expenditure in question does not become personal merely because it is not mandatory or obligatory but voluntary. What is spent for the benefit of employees or what advances their interest or is meant to discharge their liabilities or conduce to their well being or comfort can be taken as part of their earning/perquisite, particularly if it is so provided in law.

It is a legitimate expenditure which has been wholly and necessarily incurred for the employer's own business or profession and which could have been paid openly or legally as remuneration, direct or indirect to the employee concerned for the services rendered by him to his employer. It is certainly not the employer's non-business outgo. It may be added, however, that the value of a fringe benefit would not cease to be the employee's income even if the employer had offered him the benefits for the personal services rendered to him by the employee.

Individuals and Hindu undivided families (HUFs) who were also sought to be covered by the provisions of the Finance Bill, 2005, as it was introduced in Parliament, have been excluded from the ambit of FBT in the Finance Act as it finally emerged from Parliament and as it was assented to by the President. It is significant that the omitted provision covered only fringe benefits made available by an individual or HUF in a business conducted by him (or it), making it clear that the legislative intention was not to treat or operate FBT as an expenditure tax.

The result of the omission of individuals and HUFs from the ambit of Chapter XIIH is that there will be no tax in the hands of the individual employer or an HUF on the fringe benefits collectively enjoyed by the employees in any business or even non-business establishment of the individual or HUF.

There is thus an apparent discrimination due to the absence in the Act of a suitable provision covering FB in the hands of employees who are individuals or HUFs. This lacuna can be easily removed by a suitable amendment to the Act to ensure that a percentage of the collectively enjoyed benefits, as determined by the assessing officer, will be assessable in the hands of the individual employees and HUFs in non-business establishments, while the tax base identified in Section XIIH can be enforced for FBT as in the case of companies, and so on, in every business undertaking even if it is owned by an individual or HUF.

(By arrangement with Corporate Law Adviser, New Delhi.)

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