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No perks for India Inc, fringe benefit tax to stay
February, 07th 2007

One of the most controversial taxes ever introduced, the fringe benefit tax (FBT) has raised the ire of both companies as well as employees whose job related activities have now been classified as fringe benefits and are under the tax authorities scanner. The hardest hit are pharma and FMCG companies along with advertising agencies who spend a lot of money on sales promotion, networking and work related travel.

There has been a constant demand by the corporate sector to rollback the tax, which was introduced in Budget 2005-06 by Union finance minister P Chidambaram. It was introduced because as Chidamabram said, There are many perquisites that are disguised as fringe benefits, and escape tax. Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material value.

The government then made necessary changes in the Income Tax Act and defined fringe benefits in section 115WB of the Finance Bill, to mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment. It fixed the tax rate at 30% on an appropriately defined base and brought activities such as employers expenses on entertainment, travel, employee welfare and accommodation and recreation. The tax was originally levied on employers contributions to superannuation funds as well as expenses incurred on employee transport.

However, in Budget 2006-07, the government watered down some of the provisions of FBT to permit companies to provide a few perks to their employees such as a relaxation in exemption limits on contributions to employee pension funds and tax exemptions in case of expenditure by employers on employee transport, free medicine samples and celebrity endorsements. While the tax may seem new to India, it is already levied in the United States, the United Kingdom, Canada, Australia, New Zealand, Japan. The FBT rules proposed by Chidambaram are modeled on the Australian system. The only difference is that in India it is levied at anywhere between 10% and 50%, whereas in Australia it is taxed at a flat rate of 60%.

Taxing Times
There has been a constant demand by the corporate sector to rollback the tax introduced in Budget 2005-06
The FBT rules proposed by Chidambaram are modeled on the Australian system
 
India Inc however, is not too happy with the tax, even with the changes brought in last year. It is of the view that the items that have been brought under the ambit of FBT are not fringe benefits but are an essential part of the job profile and so it should either be withdrawn completely or reviewed.

Another major grouse that it has against the tax is that it increases the tax burden on them and they feel that the 33.36% corporate tax they pay is quite high and they should not be burdened by further taxes. One of the key proposals discussed during a pre-budget meeting of the finance minister with industrialists and industry chambers was scrapping of the FBT and instead hiking corporate tax rate by another 1% or 2%.

However, the proposal itself is likely to be scrapped as North Block feels FBT is a very valid tax and increasing corporate tax would not have the same effect since the effective tax rate for companies is much lower at about 17% due to a number of tax sops. Buoyant tax collections are also another reason why North Block is not keen on tinkering with the tax. While gross direct tax collections stood at Rs 1,82,880 crore till mid January registered a growth of 65.2% at Rs 2,933 crore till Decemebr end. It is expected to fetch about Rs 6,000 crore during the fiscal.

Tax experts feel the strong collection figures make it unlikely that the tax would be scrapped or rolled back. They too however echo India Incs views and are of the view that the tax has created an additional compliance burden for companies and is unfair to loss making companies, who too are expected to pay FBT. Foreign companies too feel the heat of FBT, as the tax is not eligible for tax credit in their own countries.

Amitabh Singh, tax partner Ernst and Young said, A complete rollback appears to be unlikely but it would be good if the finance ministry considers removing some heads such as sales promotion that fall under the FBT net. Nisha Gupta, principal consultant PricewaterhouseCoopers agrees, While a rollback does not seem possible, the government must rationalize the tax as it is very presumptive in nature. It should withdraw items such as ad spend and sales promotion from its ambit and lower the rate on items such as telephone and transport allowances.

 
 
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