The two articles listed below address one of the most controversial aspects of Budget,2005. The Fringe Benefit Tax has attracted widespread criticism from India Inc. Is this criticism justified?
o o o o o o Taxing FBT The Hindu Business Line Editorial | Mar 30, 2005 http://www.blonnet.com/2005/03/30/stories/2005033000300800.htm THE FINANCE MINISTER, Mr P. Chidambaram, has promised a stable tax and policy environment through a new Income Tax Bill by the year-end or January 2006. He has also admitted to far too much clutter in the income-tax law, though this was obvious to every one. He has even promised a quick clean-up of a number of non-revenue provisions in the tax law through an amendment Bill. So far so good. But some of the direct tax provisions in Budget 2005-06, such as the Fringe Benefit Tax (FBT), seem to suggest an impuissant approach by the Government to directly confront the serious problem of a declining tax to GDP ratio. Successive committees set up to suggest tax reforms, headed variously by Messrs Raja Chellaiah, Vijay Kelkar or Parthasarathy Shome, have suggested unambiguously that exemptions should go and tax rates for both corporates and individuals should come down. But introduction of such items as the FBT in an already complicated Income-Tax Act indicates a clear deviation from the avowed policy of reducing the IT rates to East-Asian levels and de-mystifying the complex tax laws. While exemptions have not gone away (except the axe on the standard deduction for TDS returnees), the tax rates (in terms of what one has to bear) have actually become stiffer, making not only compliance cumbersome, but also costly, especially for business houses. Interestingly, none of the committees had suggested such a tax, for they all thought, rightly, that the immediate priority of all-round tax reform has to be tax administration and simplification of procedures. The FBT, incidentally, will call for separate assessment, returns, appeals, etc., all enough to give nightmares to the assessee. It would also in a sense amount to two kinds of tax payments from the same profit and loss account of Indian corporates. A new Section 271FB is proposed to be inserted in the I-T Act to provide for levy of penalty on the employer for failure to furnish a return of fringe benefits. The moot point here is that instead of moving to an assessee-friendly regime, are we not being pushed towards a more complicated one, which may also have the potential to emerge as a drain on our precious national resources. Where are the real steps to boost revenue? The FBT burden, if passed on to the hapless employee, it is uniformly felt, will surely lead to a shrinkage in spending by the average individual. Call it a cautious approach, or saving for a rainy day, but spending by most salaried people will reduce once the indirect impact of the FBT is felt across Corporate India. According to one school of thought, more spending of unaccounted money may happen, while the Government tries to plug other holes. And for the employer, the 30 per cent rate by way of FBT coupled with a 10 per cent surcharge and the 2 per cent education cess will mean a much higher tax burden. For the I-T Department, this will open up a whole new mechanism of parallel proceedings, including litigations, which may turn out to be a colossal national waste. o o o o o Fringe at the core The Hindu Business Line Editorial | Mar 30, 2005 http://www.blonnet.com/2005/03/05/stories/2005030500070800.htm 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. ------------------------ Yahoo! Groups Sponsor --------------------~--> Has someone you know been affected by illness or disease? Network for Good is THE place to support health awareness efforts! http://us.click.yahoo.com/RzSHvD/UOnJAA/79vVAA/NJYolB/TM --------------------------------------------------------------------~-> �������������������������������������������������������� This is ZESTEconomics. Post economics-related articles and event info to [email protected] If you got this mail as a forward, subscribe to ZESTEconomics by sending a blank mail to [EMAIL PROTECTED] OR, if you have a Yahoo! 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