Financial Daily from THE HINDU group of publications
Saturday, Mar 12, 2005
Industry & Economy
Notional disallowance a better bet?
Kolkata , March 11
HINTING at a possible distortion in employer-employee relations, if the proposed fringe benefits tax is brought into play, direct tax experts here feel it may be a much better idea to make notional disallowance under the old sections 37(2) to 37(5) in the Income-tax Act.
Talking to Business Line, Mr N.P. Jain, senior tax lawyer, suggested that instead of introducing this new FBT, the Finance Minister may revive the old provisions, as mentioned above, most of which provided for part disallowance of entertainment expenses, expenses on guest house, hotel stay, publicity, sales promotion, running and maintenance of cars etc. He said under any case, the employer would be required to pay tax only in case of positive income after such disallowances.
Asked on the deeming provision with regard to FBT, Mr Jain said the FBT was proposed to be levied on certain expenditure on an ad hoc basis, irrespective of any gain derived by the employee, "and this may have serious repercussions, as even a loss-making employer will have to pay the tax."
Mr Jain said a careful study of many of the items included in the list of deemed benefits clearly indicates that FBT is a device for notionally disallowing the expenditure that was earlier also disallowed under sections 37(2) and 37(5). "When these sections were omitted, the then finance ministers had termed the said disallowances as notional and insisted that the tax should be on real income.
Thus, the levy of FBT now is akin to taking a `U' turn, which cannot be appreciated in a liberalised economy."
Describing FBT as a step towards collection of tax at a higher rate, he felt the provisions as proposed were in itself a code and will lead to more complications.
The proposal is to tax fringe benefits at the rate of 30 per cent under Section 115WA (under new chapter of X11H), over and above the 10 per cent surcharge and two per cent education cess.
Payment of such tax will also not be allowed as a deduction in the hands of the employer owing to the amendment proposed in Section 40 of the Act, effectively dealing a double blow to the corporate sector.
Describing it as a tax on expenditure, which was not the basic thrust of income-tax law, the expert said the FM needed to revisit the issue, if he intends to simplify tax law.
He said if the tax has to be retained at all, it should be allowed as expenditure in the hands of the employer, as all these expenses are mostly business-related and in the nature of obligations towards employees.
According to Mr D.B. Desai, applying FBT to contributions by the employer to an approved superannuation fund (tax charged on the actual amount) will deliver a hard blow to the most decent employee welfare measure. Describing the step as pretty harsh, he said it was nothing short of a "legalised loot."
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