The Fringe Is Loony

Rahul Bajaj called it "a stupid tax" and offered to pay a couple of percentage more as corporate tax if the government scrapped this specific tax. Former CEA Shankar Acharya called 2006 "the year of bad taxes". Business associations have filed petitions questioning the validity of this tax (all the pleas will now shift to the Supreme Court). Even the existing CBDT chairman called it a "trauma". Those at the receiving end of the controversial fringe benefit tax (FBT) imposed by finance minister P. Chidambaram in his last budget find it difficult to believe that this is the same FM who slashed income tax rates with his very fine sword in 1997.

The growing angst against FBT stirred the heart of the prime minister enough for a reconnaisance to be ordered, mainly to see if the ends did really justify the means. Even the ruling Congress joined in the protests by seeking its removal in its budgetary wishlist. As a result, one small part of the forthcoming budget is now certain. The FBT will be reformed and made less, well, taxing. And if PM Manmohan Singh intervenes, say finance ministry sources, it may even be scrapped just days before this year's budget.

But why is Chidambaram not interested in removing it altogether? Simply because it has been a success from the North Block's point of view. Till end-January, income tax collections showed a 35 per cent rise to Rs 44,491 crore, of which FBT's contribution was Rs 2,744 crore. Although it was much less than the targeted Rs 6,000 crore, it isn't an insignificant amount to let go. Experts put the potential of the FBT at Rs 12,000-15,000 crore!

So, the FM, at best, wants to remove or rephrase the prickliest and most ambiguous provisions of the FBT, which essentially taxes legitimate business expenses like advertising, sales promotion and travel. Chidambaram had himself said last year that he would look into the definition of genuine expenses, it's another matter he didn't. Other issues relate to the FBT on collective staff welfare schemes like contribution to superannuation funds and group insurance. And companies are hoping that the norms for valuation of fringe benefits for tax, ranging from 10 to 100 per cent, will be juggled around and the existing stipulation for filing four separate quarterly returns scrapped.

Ironically, the main charge against the FM is of complicating and misdirecting tax reforms, going against his own stated principles in his previous budgets. As Acharya puts it, it's against "the thrust of greater simplicity and transparency in the tax structure...and a reduction of complex tax rules pregnant with the possibility of discretionary abuse." The CBDT's 40-page explanatory circular issued last August with 107 questions is a pointer to the complexity.

Says Amitabh Singh, tax partner, Ernst & Young India: "The open-ended wording of the (relevant) section permits easy inclusion of newer items (of expenditure) liable to FBT." Adds Rajalaxmi Kamath, visiting fellow, IGIDR: "The entire section, which talks of 'deemed' fringe benefits, was hastily crafted." That just about sums up the expert views on the new law!

Secondly, as a tax on expenditure, FBT is an uneven burden. The matter is complicated by the various special dispensations and rates granted (and likely to be granted) for certain sectors. For instance, the pharma sector rightly seeks waiver of FBT as it's essential business practice for them to employ medical representatives and distribute free drugs. Similarly, in many industries, transport cost is a large part of genuine expense. Says Anil Panwars, director (group finance), Fortis Healthcare: "The FBT has adversely affected genuine expenditure and employee welfare. While the corporate tax rate was reduced, it went up through the back door via FBT. " Adds O.P. Singh, CEO of Pune-based Venkateswara Hatcheries: "There is now an excess burden on costs, especially due to FBT on sales promotion and export hospitality. The government talks of encouraging processed foods industry, so it should exempt the job-creating poultry business."

Such demands will only grow with time. So will court cases and disputes over claims and refunds. Says Assocham capital markets committee chairman S.K. Mitra, who is director with the Aditya Birla group: "FBT, being extremely detail-oriented, may lead to enormous, costly litigation, and pressure tactics from IT officials will trigger corruption at all levels."

Thirdly, FBT has added to the general burden of an already overburdened taxpayer group, most of which is the salaried class. A number of companies have shifted the FBT burden by adding the perks to the employees' salaries, thus hiking the individuals' tax outgo. Worse, it has prompted many companies to withdraw group benefits, instead reimburse the individual. Says Singh: "Many companies have suddenly stopped the group insurance and other funds they used to run with the lic. It has affected insurance companies' business." In effect, the FM is discouraging social security investments in a country where there is no social security net.

Even if one accepts the FM's rationale for introducing FBT—to take his fair share of the gap between what employers offered for taxation and what they actually spent on employees—why did he come out with such a poorly drafted tax? The FM says he had consulted the chambers for a month on FBT before the budget, on which the chambers are mum, but a look at the FBT laws in Australia and New Zealand, on which the Indian version is based, yields glaring differences between the two.

In both these countries, fringe benefits are recognised as perks or payments to employees in a form different from salaries or wages. They distinguish between attributed (allocated to an employee) and non-attributive (pooled/shared among staff) benefits. Says Kamath: "The NZ way of having a clear-cut list of fringe benefits (with exemptions if it is a business-related expense) is more efficient. That is because there will be greater thought and analysis of the kind of FBs typically given by Indian companies. So the onus will be on the assessee to prove that it isn't, and take the exemption. This way, companies can also plan, ex ante, their expenses and tax liabilities."

The Indian way of defining FB is "any consideration of employment" provided by way of "any privilege, service, facility, or amenity, directly or indirectly...by way of reimbursement or otherwise". The "deemed" FBs, especially, are ambiguous and—Kamath agrees with the companies here—meticulous logs and records have to be maintained to separate the personal from the work-related.

Tired of defending himself, Chidambaram said last year that in a country where the effective corporate taxation rate is 16 per cent, FBT is eminently justified. The recent rise in the number of high-earning private personnel, who enjoy various exemptions, was at the back of his mind when the tax was drafted. Singh has said that the total exemptions could amount to over a lakh crore of rupees by way of lost revenue, especially since some of them have clearly outlived their utility. Just the exemp-tions given to the corporate sector amount to around Rs 55,000 crore, says a recent NIPFB study.

Faced with increasing investment commitments and a stagnant tax-GDP ratio, the FM chose to embrace the devil of the details. But this year, he'll probably redraft them—especially the ones relating to FBT. He can afford to do it thanks to the nicely chugging economy.