The Hindu Business Line : Nuts and bolts of fringe valuation

THE much-awaited circular on fringe benefit tax (FBT) was released by the Central Board of Direct Taxes (CBDT) on August 29, 2005. Circular No.8/2005 (Ref F.No.142/21/2005-TPL), running to around 40 pages, is probably one of the lengthiest. If one of the most controversial chapters in the Act has to be explained through a 40-page circular, it either means the provisions are unclear and susceptible to various interpretations or there is strong case to henceforth incorporate circulars as part of the Act itself.

Various seminars on the subject have highlighted that explanation for each of the FBT entries is required through a clarificatory circular not only for the assessee but also the for the departmental officers who have to start the process of assessment one year down the line.

A careful reading of the circular's contents makes it clear that most of the questions that were raised have been answered one way or the other by the CBDT. In that respect this circular is wholesome since at least there is a categorical "Yes" or "No" to some 100 FAQs. Assessees will again raise several questions for each of the answers and that is inevitable. No circular can clarify all the doubts and visualise all possible situations. The CBDT deserves credit for the effort put in to collate the queries raised in various quarters on FBT.

Objective and justification

The first part of the circular justifies the levy of FBT through the canons of equity. Para 2.1 of the circular states thus:

"The taxation of perquisites or fringe benefits is justified both on grounds of equity and economic efficiency. When fringe benefits are under-taxed, it violates both horizontal and vertical equity. A taxpayer receiving his entire income in cash bears a higher tax burden in comparison to another taxpayer who receives his income partly in cash and partly in kind, thereby violating horizontal equity... "

The justification of FBT on the grounds of horizontal and vertical equity is questionable. Over the years, there has been a clear departure from equity purely for the sake of simplicity — the classic examples being dividend distribution tax and treatment of long-term capital gains. A flat rate of tax or tax in the nature of presumptive tax sacrifices equity for the sake of simplicity. Therefore, justifying FBT as equitable defies logic. Clearly, the idea seems to be to shift the burden from the millions who receive perquisites/benefits to the disbursing officer.

The issue of collective enjoyment of benefit is also untenable since in several cases payments are made purely to advance the cause of business. Any pay package has to be viewed in the context of the industry which packages it. The software and IT-enabled services (ITeS) sectors have a completely different salary structure than traditional hardcore manufacturing companies. If a young software engineer prefers to have his entire pay packet as cash emoluments, then it is only a reflection of times and not a subject matter for taxation.

The developments in the sunrise industries should not be the only consideration for FBT levy, which sweeps across both traditional and modern industries. In the process, the justification of equity falls flat. Further, there is no mention in the objective that the prime reason clearly is to generate additional revenue. The revenues garnered in July 2005 have been encouraging. Over the next six months, the coffers will definitely swell even as employers get their FBT calculations right.

Valuation

One of the problems often put forward is the difficulty in valuation of benefits. The Income-tax Rules, 1962 were recast in 2001, with substantial changes to the manner of perquisite valuation. Several decisions on the subject, including stock options, have now crystallised into workable solutions vis-à-vis perquisite valuation.

Even in the wealth tax regime, there were difficulties in valuation of assets but these were surmounted through a process which evolved over a period of time and settled into acceptable forms of valuation. After all, in most of the perquisite payments, actual cost to the company is available from the records itself. Further, the issue of disguised reimbursement of expenses to employees are, by and large, a matter of the past. Companies have now structured their payment obligations to employees on cost to company (CTC) basis. Reimbursements are minimal. The past 4-5 years have seen the development of fairly transparent and comprehensive CTC pay structures.

Notwithstanding the misgivings on the FBT front, the 40-page circular establishes beyond doubt that FBT is probably here to stay. Such circulars provide the much-needed clarity to all concerned.

As far as employers are concerned, clarifications which are in their favour would undoubtedly be welcomed. But what if a clarification goes against their interests? It is settled law (CIT vs Hero Cycles — 228 ITR 463 (SC) that circulars bind the Department but not the appellate authorities, tribunals, courts or assessees. Will employers agitate the issue, challenging that an answer to a question through a circular is not legally binding on them?

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

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