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FBT revisited
February, 03rd 2007
The fringe benefit tax regime hasn't completely sifted grain from chaff

That the Fringe Benefits Tax (FBT) regime was introduced by the Finance Act, 2005 with effect from the assessment year 2006-07 in order to capture into the tax net the numerous freebies provided by the corporate sector to its employees.

But a careful look at the relevant provisions shows that not all the expenses targeted belong to the difficult-to-pigeon-hole genre. Contribution to superannuation fund initially attracted 30 per cent FBT on the full amount. The Finance Minister relented the very next year and, therefore, from the assessment year 2007-08, FBT would be imposed only to the extent such contribution is in excess of Rs 1 lakh per annum per employee.

Beneficiaries identifiable

In the first place, there was no need for bringing contributions to superannuation fund under the FBT regime because individual contributions are easily identifiable as borne out by the climb down, exempting Rs 1 lakh per employee from the FBT. In the event, if anyone must be taxed on this count, it must be the employee directly benefiting from such contribution, bearing of course in mind that pensions which would be carved out of such contributions are in any case taxable in the hands of the individuals receiving them.

Scholarships are another item of expenditure that shouldn't have been brought under the FBT regime in the first place because the individual beneficiaries are easily identifiable and tax ought to be imposed in their hands direct. Surprisingly, scholarships have been bracketed with expenses on festival celebrations in the matter of `divining', as it were, the personal content.

Fifty per cent of both the expenses, among others, attract FBT. The point is festival expenses and scholarships are different kettles of fish while it is impossible to pinpoint the quantum of benefits enjoyed by individual employees out of festival expenses and, therefore, there was a case for bringing it under the FBT regime, no such case exists for scholarship which can easily be pigeon-holed. And why should only 50 per cent of scholarship attract tax? There is no reason why the employee concerned should not be called upon to pay tax on the full amount. The same argument holds good for gifts too. Expenditure on gifts given to employees is amenable to pigeonholing in the employees' hands. And it is they who should be taxed and not the employer.

Needless exclusion

Free samples distributed to doctors by pharmaceutical companies have been excluded. But what has raised eyebrows is the exemption given to celebrity endorsement expenses. The words used are "expenditure by way of payment to any person of repute for promoting the sale of goods". It boils down to this: If an ordinary model is paid, his fees would be subjected to FBT, but if a celebrity like Amitabh Bachan or Aishwarya Rai were paid for endorsements no FBT would be levied.

It is another matter that a company may quibble over the meaning of the term `repute' given the fact that even lesser mortals are honourable people with repute. Incidentally one wonders who lobbied so hard for excluding celebrity payments from the purview of FBT. That employees benefit from payments to ordinary models but do not from payments to celebrities is difficult to stomach. The truth is no employee even remotely benefits from such expenses irrespective of whether the recipient is a man or woman of repute or not.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)

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