The Hindu Business Line : FBT, lacking in equity

Before the presentation of the Budget, there was considerable expectations on the Fringe Benefit Tax (FBT) front. But the industry seems disappointed with the changes proposed. The basic issue of the FBT on leftover business expenses remains unresolved. The Finance Minister has been expressing the view that all expenses incurred by a businessman are liable to the FBT on presumptive basis. In his speech of May 2, 2005, recommending the passing of the Finance Bill, 2005, he described it as a presumptive tax. When the apparent anomaly regarding business expenditure was brought to the Finance Minister's notice, he justified the approach saying that if selection is made in regard to expenses for levy of FBT, it is prone to misuse by the taxpayers as then the expenses can be shifted to the head, where the FBT is not leviable.

The Finance Minister feels that an en-bloc and ad-hoc approach is necessary in the matter of taxing FBT to check avoidance of tax by assessees. Such an approach merely shows lack of confidence in auditing of the accounts by the chartered accountants and the investigating capabilities of the I-T Department.

Coming to the presumptive theory, presumptive tax cannot apply in the situation under consideration.

The FBT provisions identify certain expenses, which are in the nature of business expenses and presume that the employees must have enjoyed certain benefits from such expenses also and, therefore, the employers must pay tax on business expenses too, ignoring the basic philosophy under the I-T Act that the burden to prove of what is being asserted is on the person, who says or asserts it. In enacting the FBT, a new tax jurisprudence has not only been invented but is also being justified.

The FBT has been justified on the grounds of equity, both vertical and horizontal. However, if business expenses are subjected to tax en-bloc on the apprehension that the taxpayers can twist these for the benefit of employees, it would cause severe inequity rather than promote horizontal and vertical equity.

Safeguards can be provided to check camouflaging of expenses on employees as business expenses' by providing that these expenses are properly audited under the auditing prescribed under the Companies Act, as also under Section 44AB and the Institute of Chartered Accountants of India can lay down appropriate standards for this purpose.

The need of the time is that the expenses by the employers must be classified by the IT Department in two categories namely: Expenditure, which results in benefit to employees; and expenditure, which are business expenses of the nature enumerated earlier.

Such expenses can be subjected to auditor's scrutiny to find out whether these include any benefits to employees. If so, these can be excluded and added to (a) above. Then, the whole amount falling in category (a) can be subjected to the FBT on the principle of vertical and horizontal equity. Taxing the entire business expenses under the FBT on the presumption that some part of it must have incurred for the benefit of employees also would be most inequitable, unfair, unjustified and oppressive and need to be re-examined.

(The author is a former Chairman of CBDT.)