Spare us from FBT
Shariq Contractor
C.A.
The Fringe Benefit Tax (FBT) introduced last year by the Finance Minister met with widespread resistance from practically all quarters. The Commerce Ministry and even the PMO has backed the demands for a complete re-think on FBT on the ground that it adversely affects the competitiveness of India businesses in the world market. Several writ petitions have been filed challenging the constitutional validity of this tax.
In the face of this sustained pressure, the FM has conceded that in this Budget he will make amendments to provide relief to the taxpayers, based on representations received from all quarters. However, one hopes that even at this late hour wiser counsel prevails and the FM totally removes this obnoxious tax.
FBT ostensibly was meant to cover any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees on account of their employment. The rationale as stated in the Explanatory Memorandum to the Finance Bill was to tax the employer in respect of those benefits which are usually enjoyed collectively by the employees and cannot be attributed to individual employees.
However, the scheme of FBT has strayed far beyond the above stated objective. An artificial presumption has been introduced to provide that if any expenses are incurred under the prescribed 16 heads of expenditure, then benefit will be deemed to have been provided to the employee. This more often than not results in several legitimate business expenses having no bearing or relation to employees, leave alone providing any benefit to the employee, being subjected to FBT.
The value of fringe benefits is determined on a presumptive basis by applying the specified percentage to the specified expenses. The percentage ranges from 5% to 50% depending on the nature of business of the employer and the type of expenditure. In most cases the applicable percentage is 20% and hence the presumption is that 20% of the expenses under that head will be deemed to be for benefit provided to the employee. Since FBT payable is 30%, the actual tax liability on such deemed fringe benefits would be 6% plus applicable surcharge.
The CBDT through a circular has clarified that the presumption that the employee has derived a benefit is implicit in the relevant percentages prescribed and is not a rebuttable presumption. Surely, this is totally unjustified as it seeks to create a fiction to tax genuine expenses (i.e. sales promotion) that may have resulted in providing no benefit to the employees.
The FM has talked about international best practices and the system followed in Australia and New Zealand. He seems to have conveniently forgotten that in both countries the taxing authorities have categorically stated that FBT would be attracted only in respect of those expenses resulting in providing benefit to the employee.
In a country where the track record of the Government in providing basic living conditions to its citizens is abysmal, the right approach would have been to encourage employers to institutionalize welfare measures for its workers. Unfortunately, FBT discourages employers from providing non monetary benefits, particularly to employees in low income brackets. It therefore deprives the common employee of benefits that could have supplemented the lack of social security provided by the Government.
Besides being unfair, FBT dents the competitive advantage of the Indian companies as the overall cost of companies will go up by 6% to 15% of the specified expenses. Since FBT is payable even if the company is not liable to income tax, it will particularly hit loss making and start up companies.
Besides, FBT casts a huge procedural burden on the employer as the entire procedure of filing the return, payment of advance FBT, completing assessment, rectification, re-assessment etc., will have to be followed. The provisions relating to computation of fringe benefits are highly controversial and instead of simplifying our already complex tax laws, are going to invite a spate of unending litigation.
Expenses can either be taxed as perquisites in the hands of the employee or can be taxed as fringe benefits in the hands of the employer. Hence the employer may well prefer to pay the FBT of 6% (plus applicable surcharge) rather than provide a perquisite taxable in the hands of employee where the effective rate of tax may be as high as 30%. For example expenses on motor car provided to employees would now attract FBT @6% and would not be treated as perquisite taxable in the hands of the employee. It is highly questionable if FBT will generate the expected revenue for the Government as most employers will be compelled to re-design the salary package in the new FBT regime depending on the income bracket of the employee. By and large employees in the low income bracket will be denied fringe benefits.
FBT is an unfair, arbitrary, artificial and complex tax that needs to be abolished. It is a tax that defies all cannons of good taxation. Let us hope and pray that instead of tinkering with this highly objectionable and controversial piece of legislation, the FM in this budget gives FBT a permanent burial.
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