The Hindu Business Line : On the outer fringes

EVER since the Finance Minister, Mr P. Chidambaram, announced in his Budget 2005 speech his intention to impose fringe benefit tax of 30 per cent on expenditures to the extent they are on personal account or deemed to be on personal account as opposed to business account, there has been a howl of vociferous protests.

One hopes the Finance Minister stands his ground except where amendments are genuinely called for. And to my mind there are only two specific areas, which call for rethink — tax on contributions to superannuation fund and tax on part of sales promotion and advertisement expenditure.

Intrinsically, the move is founded on logic — personal expenses ought not be allowed as business expenditure. That the new regime has actually been lifted from the Australian tax code also does not detract from its intrinsic merit.

But the Finance Minister has left an issue unattended. Besides, the industry would now start working overtime towards outmanoeuvring the new regime.

Section 44AB of the Income-Tax Act provides for tax audit where the turnover exceeds Rs 40 lakh and in case of professions, Rs 10 lakh. Curiously, there is no concomitant amendment proposed to this section to mandate the audit of the aspects impinging on fringe benefit tax.

An express amendment is necessary now that there would be two returns — return of income and return of expenditures governed by the fringe benefit tax.

One expects the income-tax rules would be amended for this purpose. But it would have been so much better had Parliament itself bestowed its attention on this vital issue.

Nobody knows why there is a reference to `entertainment' twice over — one as such and again in different words, "provision of hospitality of every kind by the employer to any person". The reference to any person queers the pitch. Be that as it may. There is bound to be a lot of hair splitting on expenses incurred by companies in running an elaborate kitchen — who ate — given the fact that food and beverages provided to employees inside the office or factory is not hit by the fringe benefit tax.

If a supplier or customer or a nosy government official were extended hospitality in the company canteen, 50 per cent of the expenses would be exposed to the fringe benefit tax. Every company having a dining room will have to maintain a register of visitors distinguishing between employees and outsiders.

This may not be difficult but its authenticity would always be suspect given the fact that there would always be a temptation to camouflage an outsider as an insider. One may shrug off this apprehension on the ground that company dining rooms are hardly the place for entertaining people who matter.

But then there are companies, which can justly be proud as much of their wares as of their kitchen. And an outsider may after all not spurn the elaborate spread offered therein.

`Hotel, boarding and lodging expenses' attract only a 20 per cent axe against a 50 per cent axe on entertainment expenditure.

This clause, coming as it does after the clause relating to conveyance and tour expenses which also attracts only a 20 per cent axe, conveys the impression that the Finance Minister wants to be soft on employees' travel bills. But the harried companies clutching at every straw would take this as a godsend — debit all hotel bills whether on staff or others to the more agreeable umbrella head called `hotel, boarding and lodging expenses'.

The taxman, however, is not going to take kindly to this gimmick. He is going to examine all the hotel expenses with a fine-tooth comb and insist on taking them as entertainment to the extent these related to customers, suppliers, government officials, and so on, so that they can be subjected to a harsher dose of tax — 30 per cent of 50 per cent rather than 30 per cent of 20 per cent.

The proposed new regime makes it clear that what is already being taxed as perquisites under Section 17(2) in the hands of the employees would not be taxed once again in the hands of the employer as fringe benefits. The Explanation to Section 17(2)(iii) bails out company transport from the clutches of perquisite if such transport was scrupulously, touché, used only for commuting between place of work and residence.

This affords one an opportunity to avoid tax by declaring without batting an eyelid that the company vehicle was scrupulously used only for this limited purpose.

The fringe benefit tax code which has been introduced with the avowed purpose of overcoming the difficulty in sifting the personal expenses from the mass of personal-cum-business expenses would have put paid to such attempts had it not been botched by unnecessarily exempting the expenses incurred by the employer on enabling employees to reach place of work and back home from the clutches of fringe benefit tax.

Now, we are back to square one — how to sift the conveyance expenses on employees from residence to office and back from the homogenous mass of conveyance expenses.

If employees give a declaration that the car given to them was scrupulously used only for this limited purpose, then there would neither be a tax in their hands nor a fringe benefit tax in their employer's hands.

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

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