The Hindu Business Line : Taxing FBT

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.

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