Mohan Padmanabhan

Kolkata, April 15

SMALL and medium industries fear that the proposed levy of Fringe Benefit Tax (as an additional income tax) at the rate of 30 per cent on all "deemed" fringe benefits by a company, firm or even a local authority, under the new section 115WA of the Income-tax Act, would hit hard the SSI sector.

This fear is also shared by direct tax experts, who say that FBT may have a crippling effect on the economy, as a whole, as it may severely constrict spending by one and all. They dubbed it as a tax on expenditure and not on income, as made out. And not allowing it in the books of accounts as an outgoing for tax purposes was a double blow, it is felt.

It is pointed out that FBT was a replica of many of the past Finance Bill provisions for partial disallowance of certain items of business expenditure (under section 37(3A) of I-T Act). These were removed by earlier finance ministers in their budget proposals, like Mr V.P. Singh in Finance Bill, 1985, and by Mr P. Chidambaram himself in his previous avatar as Finance Minister in 1997. Experts feel these are lifted straight out of the old Bills and put under as FBT in Finance Bill 2005.

Mr Chidambaram, in clause 8 of the Finance Bill 1997 had clarified that "these artificial restrictions are out of tune with the concept of real income. Therefore, the Bill proposes to remove all these ceilings and allow the expenditure actually incurred for the purpose." Certain sub-sections of 37 provided for certain ceiling on expenditure in the nature of entertainment expenses, travel and advertisement expenses, guest house expenditure, etc.

In the case of Finance Bill 1985, the items of expenditure specified for the purpose of disallowance, (and later allowed to continue), were, advertisement, publicity and sales promotion, running and maintenance of aircraft and motor cars and payments made to hotels.

Experts say that levy of an additional income tax, as proposed, on notional income was against the spirit of the Supreme Court's judgement in the case of Kedarnath Jute Manufacturing vs CIT. The apex court, according to Mr Narayan Jain, noted tax lawyer, has clearly stated that assessable profit of a business must be real profits after allowing the outgoings. The apex court had held that "income tax can only be on real profits and not on notional profits."

Mr Jain felt such a levy on deemed fringe benefits would only lead to more tax evasion, as more and more cash payments from unaccounted money would take place to bypass FBT, which surely cannot be the intention of a Government, which is craving for greater tax compliance and higher collections.

Talking to Business Line here recently at the sidelines of a workshop on Union Budget proposals, organised by the Federation of Small and Medium Industries (FOSMI), which enjoys a direct membership of nearly 1,200, Mr D.K. Mohta, president of the Federation said FOSMI was examining the scope for legal steps against FBT, and its committee would soon take a decision on whether court should be moved on this. It is learnt that this may be in the form of a PIL in the Calcutta High Court.

(This article was published in the Business Line print edition dated April 17, 2005)
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