The Loony Fringe

Even as Indian citizens heaved a sigh of relief over the removal of the tax on cash withdrawals from savings accounts, tempers are aflame in the corporate sector over the retention of the fringe benefit tax (FBT) by Finance Minister P. Chidambaram.

In effect, the FBT ends up taxing all corporate expenditure. Under the new rules, all business travel and related expenses, entertainment, provision of hospitality of any kind by the employer to any person, whether through food or beverages or in other manners, use of clubs, festival celebration or conferences, will attract FBT at rates of 20 and 30 per cent. While leased-line telephones have been exempt to help the bpo sector, all telephones, even those on business premises and cellphones, will attract FBT. However, the bpo sector's gains would be neutralised as transportation provided by the company for pick-up and drop to and from office will now attract FBT. That is, companies will have to pay tax on legitimate business expenses.

Says Gaurav Dalmia, director, Dalmia group: "This tax obviously was not well thought through and is regressive. It stinks of a mindset that business always cheats. That's very insulting for the corporate sector."

The introduction of FBT stemmed from the finance ministry's opinion that companies disguise benefits as business costs and these are not reflected in the employee's income, thus leading to loss of revenue for the government. Explains T.V. Mohandas Pai, CFO, Infosys Technologies: "People in the higher-income bracket got a lot of benefits through perks which people in the lower-income slabs do not get. This is supposed to tax companies for these higher-paid employees on a cost-to-company (CTC) basis." Says tax expert Girish Ahuja: "The FBT's purpose was to tax those expenses that cannot be taxed with the employee. What has come out, however, is different and will affect everyone." Agrees Pai: "Conceptually, it is a good scheme, but instead of having a tax like this, the government should have made a list of taxable perks." Instead, the government has decided to tax every employee, whether he gets any perks or not.

Till last Monday, expectations were high that the tax would be withdrawn as it had faced tough opposition from the corporate sector. Indeed, when the initial furore broke out over it after the Union Budget, the finance minister himself seemed surprised by some of the fine print in the FBT proposals and admitted there were phrasing and language errors which would be corrected. But barring minor concessions for the software, pharma and construction sectors, the government will tax everyone else, with the impact being increased in some cases.

Says N. Srinivasan, director general, CII: "The tax shouldn't have been imposed in the first place as it is a tax on expenditure and is presumptive and, thus, open to interpretation and disputes." Adds tax expert Sandeep Shanbhag: "During the budget speech and later too, the finance minister kept reassuring that all legitimate business expenses will be left out of the FBT net. However, this is not the case." To add to the corporate sector's problems, even loss-making companies, including those under bifr, would have to pay FBT.

Says Daljit Singh, CEO, Fortis Healthcare: "A lot of business happens over dinner or other forms of entertainment. These are not done out of choice but is a mode of conducting business. Putting tax on food, beverages and hospitality will ultimately hamper business."

Companies are particularly piqued at the inclusion of travel expenses, which they say, are intrinsic to business. Says Rajan Varma, CFO, Dabur India: "The fundamental issue is to determine what is the fringe. If I am travelling on a business trip, how is it a fringe benefit?" The new rules give blanket discretionary powers to the assessing officers to determine what a fringe benefit is. This, everyone feels, will lead to disputes and corruption.

One of the most debated issues is bringing superannuation funds under FBT. Under the new tax rules, all contributions made by companies towards superannuation schemes will be taxed at 30 per cent. Says Shanbhag: "This is one of the most unfair instances of taxation. The government cannot provide social security. That's fine. But if the private sector tries to provide it, the government wants to tax that too. In any case, the annuities from the superannuation fund are being taxed. These used to qualify for standard deduction. That, too, has been removed." Ironically, with FBT, superannuation schemes would be taxed twice—at the company level while making the contribution and with the employee on maturity.

Already, companies are thinking of ways to evade tax on this count. Rumours are that companies like Nicholas Piramal and Escorts are thinking of discontinuing their superannuation schemes. Some are considering paying it to employees on a monthly basis which would increase the employees' tax burden.

While companies are still reading the fine print and calculating the damage, rough industry estimates reveal that the impact would be significant. For instance, India's only Fortune-500 company, Indian Oil Corporation, would have to shell out Rs 40-50 crore plus on account of FBT. Reliance Industries may have to pay Rs 75-100 crore extra tax, while the burden on the public sector Steel Authority of India is likely to be of around Rs 40-42 crore. The impact on the IT sector, too, would be visible despite the concessions extended to them. Market estimates put the impact on Infosys Technologies at Rs 20-25 crore.

Of course, the FBT will end up increasing administrative costs and paperwork dramatically. Says Ahuja: "This will require a parallel assessment as separate returns will have to be filed for FBT. Every employer will have to file FBT returns even if they don't file income tax returns. This will increase paperwork for the company and revenue authorities."

CII's Srinivasan agrees: "The nature of the tax is somewhat dubious. The tax is an antithesis to the process of simplification of taxes in the country and will add too many complexities in the tax system." He feels that if the government's perspective was to garner more revenue, the cleaner route would have been to keep corporate taxes, which were lowered from 35 per cent to 30 per cent in this year's budget, at a higher level.

So, what does Chidambaram and his team gain from hurting the corporate sector? Simply, the FBT is expected to add a lavish layer of flab to the government's revenues. Says Ahuja: "FBT could easily garner Rs 15,000-20,000 crore in additional revenues if we take into account the collections from all the elements that have been put under its purview."

So, who would be the net sufferer of this? Says Dabur's Varma: "Not many companies will absorb the tax burden; they'll pass it on to the employees." Many others are thinking in a similar manner. In the end, it will boil down to the two per cent of the population who pay taxes and who will have to bear the burden of it all. But then, what's new about that take-the-easy-way-out brand of injustice?