The Hindu Business Line : An alternative idea

NOTHING in the annals of Indian taxation has perhaps attracted such a passionate debate as the ushering in of the fringe benefit tax (FBT) has done. Employers have raised a phalanx against the tax as being draconian and irrational.

Loss-making concerns see in the move a cynical apathy to their state of affairs inasmuch as the FBT regime brooks no exception and expects both profitable and unprofitable enterprises to cough up the tax.

In this sense, FBT is indeed a piece of another peremptory regime introduced by the Finance Minister, Mr P. Chidambaram, in 1997 called the distribution tax because the latter also brooks no exception and calls upon every domestic company distributing dividend to its shareholders to simultaneously pay tax to the exchequer no matter what the composition of shareholders of a given company is.

But, on the flipside, the Government's case for the FBT is equally persuasive — many benefits to employees condescendingly dismissed as fringe benefits are in fact quite substantial but hitherto got away untaxed.

And since it is hard to tax these benefits in the hands of the employees in view of the difficulty in ascertaining who got how much, which is a prerequisite for taxing an income in the hands of the ultimate beneficiary, one of the fundamental canons of taxation, the employers willy-nilly have to pick up the tab, goes the argument of the Government.

Many employers have, in the aftermath of the introduction of the FBT, been resorting to monetisation of perquisites, which simply put means increasing the cash salary in lieu of fringe benefits so as to steer clear of trouble, though they have unwittingly in the process cast employees to the wolves, as it were.

There can be no denying that fringe benefits ought to be taxed. It is equally true that by the very nature of things, fringe benefits defy imposition of tax in the hands of employees.

In the event, the tax on fringe benefits has willy-nilly to be collected from the employer. On this score, one cannot fault the FBT. However, it must be pointed out that the FBT regime has made things difficult all-round.

All employers will have to file two sets of returns — one for income or loss and the other for the fringe benefits provided. Two sets of returns mean two sets of assessments. And for a losing concern which otherwise may not have to pay income-tax, there is no reprieve from the FBT.

Considering the administrative hassles involved in the implementation of the FBT as well as the injustice to losing concerns, the regime of disallowance could be the modus vivendi.

It will garner the same revenue to the exchequer minus, of course, the FBT that would have been irrationally collected from losing concerns.

For example, under the FBT regime, though not said in so many words, 20 per cent of the entertainment expenses are deemed to benefit employees personally, and a 30 per cent tax is imposed on this.

The same results can be achieved by disallowing 20 per cent of the entertainment expenses, which effectively would push up the tax bill of the profit-making enterprises by the same amount, which the Government hopes to garner by way of the FBT.

The regime of disallowance would protect losing concerns from the tyranny of tax assuming the bottom-line remains the same despite the disallowances. The enforcement of this disallowance should not be difficult — the tax auditor should be called upon to keep an eye on this.

And at the end of the day, the Government would have got its additional tax sans the hassles emanating from two sets of assessments.

The system of disallowance would have the same chastening effect on employers as FBT — they would go slow on splurging. It is not as if it is a face-saving formula for the Government. Because by no stretch of imagination can it be construed to be a retreat or climb down. All that it would have done is to correct the distortions in the extant FBT regime.

What the regime of disallowance spells is simple — employees are not paying tax on the benefits provided by their employers, therefore, employers cannot treat the cost of these benefits as their expenditure.

This arrangement or compromise is not entirely faultless — employers are being penalised for the inability of the administration to home in on the employees — but no one expects any via media to be.

The merit of the disallowance regime is, while also being a compromise it would not be rocking the boat and ruffling feathers as much as the extant FBT regime does.

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

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