IN A SPEECH that ran to 184 paragraphs, the discussion of the Fringe Benefit Tax (FBT) lay at the fringes. But the issue of FBT has been at the centre of most analyses since, compelling Mr P. Chidambaram to the defensive stance of promising to correct unintended anomalies. It is true that there are employee benefits enjoyed collectively rather than individually. Also indisputable is the fact that many such benefits are deductible from the employer's income as legitimate business expenditure, even as these are not accounted for as the income of any employee for the purpose of taxability. The Minister's worry that employers disguise perquisites as fringe benefits and escape tax seems to have weighed in favour of introducing a whole new Chapter XII-H into the Income-Tax Act and making the employer liable for the tax at 30 per cent.

Worse, the definition of fringe benefits in Section 115WB is open-ended. Barring canteen and transport, it covers any privilege, service, facility or amenity, reimbursement, contribution to superannuation fund and so on, and extends to a host of expense heads by slapping a `deeming' provision on them. Thus, any expense towards entertainment, festival celebrations, gifts, hospitality, use of club facilities, conference, sales promotion, use of telephone and so forth are all going to form the tax base for applying the percentages prescribed by the FBT regime. For instance, 50 per cent of expenses towards employee welfare, and 20 per cent of conveyance, tour and travel, will get taxed as fringe benefit. It is criticised that the FBT provisions constitute an Act within an Act because the Finance Bill proposes a whole set of provisions on FBT, governing the filing of a separate return, advance tax, notice, best judgment assessment, tax payment, interest for delay, refund and so on. Employers cringe not only at the new fringe cost that has to be added to their employee expenditure, but also at the cost of compliance the Bill seeks to burden them with. To illustrate, an Assessing Officer will have the power to serve a notice on the employer to go over in person and produce evidence. Companies may have to think of adding `Fringe Sections' in their accounts departments, and also hiring legal officers to fight the fringe disputes to finish. And companies that were not liable to tax hitherto such as foreign or loss-making corporates will have to fork out FBT.

Not all businesses are alike, and, therefore, expediencies governing expenditure differ from one employer to other. It is not unusual for a research-based firm to spend more on travel than a manufacturer using local inputs. Now, the FBT turns the focus of tax provisions to a micro level that of the account heads to engage in hair-splitting of outlays to determine the proportion liable for tax. Rubbing salt into the sore, the Bill hastens to deny any benefit of deduction for the FBT paid when computing the employer's income. Protests shout that the tax is not on income but on expenditure, thus violating the basic tenet of income taxation. If the FBT were to stay, a simple way out for employers will be to increase the pay and cut on facilities. An alternative for the employer will be to make the perquisites identifiable with the employees so that they would pay tax on the same.

(This article was published in the Business Line print edition dated March 5, 2005)
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