The Hindu Business Line : The fluster in FBT

IMAGINE a scenario where you get tax-free salary, with the employer picking up the tabs in the form of fringe benefit tax (FBT). No, this is no pipedream. See what the Finance Minister has already done.

Tax on motorcar provided by the employer to the employee has all along been taxed in his hands. But not any longer. It will now be tax-free in his hands with the employer paying a 30 per cent FBT on 20 per cent of all the conveyance expenses.

Presumably, in the Finance Minister's estimation, 20 per cent of all conveyance expenses are on personal account.

Originally, not more than a couple of months ago, he thought this was 50 per cent. So much for the meticulous homework! Well let that pass for the nonce.

In 1997, Mr P. Chidambaram abolished tax on dividend in the hands of the shareholders and shifted the tax burden onto the companies distributing them.

He could well do the same with reference to the other important stakeholder — the employee — if the tax on motorcar is taken as the harbinger of things to come.

The distribution tax on companies was as wrong as the present move to ask companies to pay tax on motorcars used by employees on personal account because one of the fundamental canons of taxation is the ultimate beneficiary of the income — its recipient — should be taxed.

When FBT was ushered in experts empathised with Mr Chidambaram when he explained it away as being necessary to capture income that have hitherto been evading tax in the hands of the employees. Surely, motorcar does not belong to this genre.

Yes, the presumption as to the personal element was skewed in favour of the employees. But instead of correcting this, he has shifted the tax burden on this account to the employer, which is illogical and iniquitous.

Mr Chidambaram's seems to be carrying the collection-from-one-source theory a bit too far. He did this last year when he ushered in securities transactions tax (STT) in lieu of long-term capital gains tax evidently on the ground that it is easy to collect tax from a few bourses instead of from lakhs of investors.

He did it in 1997 when he ushered in distribution tax evidently once again impressed by the ease-of-collection argument. He may well do it wholesale in respect of salaries.

Mr Chidambaram says contributions to superannuation funds are gratuitous and, therefore, must be taxed. Well they must be taxed but in whose hands?

In all equity and fairness it must be taxed in the hands of the beneficiary — the blue-eyed boys, be they directors or other top-of-the-rung employees. FBT should be resorted to only where ferreting out the personal element from the indistinguishable mass of business cum personal expenditure is difficult.

The tax administration has often in the past been stumped in its efforts to disallow the personal expenses say when a beaming better half accompanied her hubby on a foreign tour having wangled the invitation from the foreign collaborator in joint names with the courts seeing a business angle to the whole thing.

The FBT definitely would hereafter check this inequity against the exchequer. In other words, FBT would succeed where disallowance failed.

But the tax administration may continue to question and disallow expenses under Section 37(1) despite the ushering in of FBT because the two have not been made mutually exclusive.

In the event, there may be a double whammy in store for companies — the taxman may disallow expenses attributable to personal benefit of employees as opposed to the altruistic business interests of the employers. And the specified percentage of the very same expenses will have to be offered on the chopping block by the companies for the proposed FBT.

The Finance Minister must expressly rule out this possibility by providing a suitable explanation to Section 37(1) — there won't be double taxation once in the form of disallowance and again in the form of FBT.

That the Finance Minister has had to scale down the percentage of expenses from 50 to 20 in vast majority of cases speaks ill of the quality of preparation his department had done in the run up to the Budget 2005.

And the capitulation to the lobbying done by the IT and the pharmaceutical industries — only 5 per cent of their travel bill will suffer FBT as against the norm of 20 per cent — is an even more sad commentary on our law-making.

This would open the floodgates for similar lobbying by other industries. In any case the differential treatment smacks of arbitrariness, which would come handy for those who denounce presumptive taxation. Differential treatment and exceptions have been the bane of our tax system, be it direct or indirect.

The BPO units are already envious of their close cousins, the software industry. Because the climb down from 20 to 5 per cent of the travel bills that have to be offered for FBT applies only to software and not the IT-enabled industries in general.

Now the BPO units contend that they too spend a great deal on travel especially at the inception of a contract from a distant client in order to understand the nuances of his business

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

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