On why FBT is fast becoming totalitarian for India Inc
January, 28th 2008
Fringe Benefit Tax (FBT) was introduced by the Finance Act 2005, to tax the benefits enjoyed collectively by the employees, which otherwise could not be attributed to an individual employee and at the same time were not taxable in the hands of the employer. Effective April 1 last year, benefit arising under an Employee Stock Option Plan (ESOP) by virtue of allottment or transfer of securities has also been brought under the FBT net.
Few amendments and lot of clarifications have been issued by the government since its introduction. Since the introduction of FBT, in-dustry has been asking for its withdrawal. The criticism is that besides being an additional tax, FBT has resulted in additional administrative cost. Further, it is effectively a tax on the expenses incurred by the company, rather than being a tax on the income.
Even in the existing form, there are certain provisions which require reconsideration, to remove genuine hardship, both tax and administrative, for the industry. These inter alia include the following:
First, contribution made by the employer to approved superannuation fund for employees up to one lakh rupees is not liable to FBT. Any excess contribution attracts FBT. It is pertinent to note that superannuation fund schemes were primarily introduced by companies in the absence of any social security scheme/retrial scheme prevalent in the country.
Further, as a general trend, these scheme are not being opted for by the employees these days due to better investment options available to them. Therefore, due to levy of FBT on superannuation schemes, primarily the employees who are in their mid careers/toward the end of their working careers, have been hit. Hence, FBT on superannuation schemes may be removed.
Second, provision of food or beverages has been made liable to FBT except were it is provided to employees in factory or office; or a meal voucher is provided to employees to be used at eating joints. It is practically very difficult to distinguish between the expenditure in-curred or payment made for food or beverages consumed by the employees in office vis--vis outside office.
Further, it is equally difficult to distinguish between expenditure incurred on food or beverages provided to guests/non-employees in office. Therefore, this provision may be deleted.
Further, companies engaged in the business of hospitality like hotel, airlines, event management etc. should be outside the purview of FBT in respect of expenditure incurred on hospitality.
Third, even though certain concession has been made in respect of the expenditure incurred on advertisement, distribution of free samples of medicines/goods , payment made to brand ambassadors under the category sales promotion including publicity, however, still genuine business expenditure incurred on sales promotion is liable to FBT.
As there is no benefit whatsoever to the employees in respect of the sales promotion activities carried on by the companies, this provision should be deleted.
Fourth, no benefit is derived by the employees in undertaking business trips, which are necessitated due to business requirements. Therefore, travel expenses incurred by the companies should be outside the purview of FBT.
Fifth, gifts made to customers and business associates, as part of sales/business promotion are a genuine business requirement, mainly due to competitive landscape in which the businesses operate. Therefore, gifts made to customers and business associates should be outside the purview of FBT.
Sixth, in most countries, benefit arising under ESOPs is taxed at the time of exercise, in the hands of the employee. In India, the benefit is taxable as FBT and is to be paid by the employer. In case of globally mobile employees (both inbound expatriates and outbound assignees); it may result in economic double taxation.
In India, the tax would be paid by the employer, while in the foreign country, the employee may be liable to tax on the same benefit. Therefore, instead of FBT, this benefit may be taxed as perquisite in the hands of employee.
Seventh, in case of ESOPs issued by foreign listed companies, it has been clarified that merchant banker can use the listed price as one of the basis of valuation and afterward recommend the best value. This effectively means that foreign companies will have to approach a merchant banker in India and provide necessary information, documents and records for the purposes of valuation to be done under different methods.
This will cause a lot of administrative inconvenience to the foreign companies. It might be a better proposition to simply use the listed price on overseas stock exchange as the basis of valuation for FBT purposes.
Therefore, it may be appropriate to have a relook at the above issues and provide some relief to the taxpayers.
Vikas Vasal (The author is Executive Director, KPMG)