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Monday, Apr 25, 2005

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Exempt superannuation funds from FBT: IRDA

Sarbajeet K. Sen

New Delhi , April 24

PRESSURE is mounting on the Finance Ministry to exempt `contributions to superannuation funds' from the fringe benefit tax (FBT). The unanimous protest by the life insurance industry against the proposal to impose FBT on employers' contribution to pension funds has now got the support of the insurance regulator, the Insurance Regulatory and Development Authority (IRDA).

The IRDA is of the opinion that contributions to superannuation funds should be exempted from FBT since taxing them could dampen the prospects of healthy development of the retirement benefit fund market, much needed to provide old-age income security to employees.

By contributing to group superannuation funds, employers seek to ensure a steady stream of income for employees after their retirement.

"I think it (superannuation funds) should be exempted from the fringe benefit tax. We have to distinguish between long-term benefits provided to an employee by an employer from those that are short-term in nature. Contribution to superannuation funds is a long-term benefit," Mr C.S. Rao, Chairman of IRDA, told Business Line.

However, he said that the matter would have to be resolved between the life insurance industry and the Finance Ministry, adding that the IRDA would not directly come into the picture during the discussions.

The Life Insurance Council, a representative body of the managements of all life insurance companies in the country, has already taken up the issue with the Finance Ministry.

"We have debated the issue threadbare at the meeting of the Life Insurance Council.

There was unanimity that inclusion of superannuation funds under the FBT would inflict damage to the development of a pension market," said the CEO of an insurance company.

The insurance industry has said that the damage that the proposed new levy could do is evident from the fact that many companies that were negotiating with life insurers for contributing to superannuation funds have put their plans on hold due to fears of tax incidence.

"This is bad for the employee who would have got the benefit and also the life insurance industry, which loses out on premium," the insurance industry official said.

In the Union Budget for 2005-06, the Finance Minister, Mr P. Chidambaram, had proposed a 30 per cent tax on companies that provide identified `fringe benefits' to their employees.

"Many perquisites are disguised as fringe benefits and escape tax. Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material value," Mr Chidambaram had said.

Some of the other perquisites on which FBT is being proposed are entertainment expenses, use of club facilities, and cost of free tickets for private journeys of employees and their families.

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