Sucheta Dalal :Fringe benefits or legitimate expenses?
Sucheta Dalal

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Fringe benefits, or legitimate expenses?  

Mar 14, 2005


The smaller companies, entrepreneurs and their employees will be the worst hit by the tax


It is amazing how this can happen, but the closer one looks at the ‘Fringe Benefits Tax’ (FBT) the more horrific it gets. It starts with the assumption that companies are spending a great deal of money on wining and dining their employees and sending them out on junkets (apparently on office time) in lieu of taxable salaries. Consequently, the government is losing large chunks of taxes that would otherwise have filled its coffers.


Where on earth does the finance minister (FM) get his ideas about employment conditions and organisational behaviour in India? Have we forgotten that we provide cheap labour to the world, even if some have a string of technical qualifications? What fringe benefits does a small company provide its employees anyway? Yes, the top 500 companies do spend money on offsite training or strategy programmes, but these are hardly holidays. Usually, they only ensure that employees work through a weekend, planning and setting performance targets for the next year. Perhaps the tax babus had BPO and information technology companies in mind. But ignored the tedious nature of work and high employee attrition rate that force the firms to enliven the work place.


The only underserved fringe benefits that I can think of are corporate jets purchased by industrialists that are used for family holidays, attending weddings, film awards or social events. And it gets worse when our industrialist MPs use these aircraft to attend Parliament and stick the tab on to their publicly-listed companies. Undeserved fringe benefits are when companies save a few thousand rupees for their CEOs (who earn eight- figure salaries) by providing home help (maids) and fruit and vegetables for daily consumption under the head of housekeeping and maintenance services. There are also companies that gift expensive paintings, jewellery or foreign holidays to their senior executives to help them avoid some taxes. But companies that dole out such perks are probably less than a hundred. And employees who qualify for corporate pampering do not exceed a few thousand across the country. Since it does not require any genius to figure that out, one must assume the FM has deliberately chosen to tax legitimate business expenses.


Take a look at what constitutes fringe benefits under Sec115WB. Sales promotion and publicity; conferences; employee welfare; conveyance; tour and travel expenses on hotels, boarding and lodging; use of telephone; provision of hospitality, including food and beverages, maintenance of guest house, club and sports facilities; car maintenance and fuel costs. And, the unkindest cut of all—scholarship to children. Someone correctly called it the Food & Beverage Tax!


When confronted by public outrage, the FM has promised to reconsider some heads, such as sales promotion and publicity expenses. But he also declared that the FBT won’t be rolled back entirely. In fact, this is a tax that needs to go in its entirety.


• Chartered accountants are struggling on ways to make the impact more fair

• Travel, telephones and entertainment are likely to be the biggest killers

• FM must continue his own policy to listen and correct obvious mistakes


While the FM may listen to representations from industry associations, those who will be badly butchered by this tax are smaller companies, entrepreneurs and all the people they employ. A vast majority of Indian companies are in the small and medium sector. They are highly motivated, struggle to grow in the face of innumerable hurdles created by different arms of the government and are forced to pay off corrupt government employees merely to avoid harassment. They also find it difficult to get bank funding (banks prefer lending to large companies, or require impossible collateral and guarantees) and have to stretch every rupee as far as it can go. This means they pay their employees the least possible wages and all their expenses are not only genuine, but are also carefully controlled.


In one stroke, the FBT has dealt all these businesses a body blow, by taxing their legitimate expenses, or throwing them at the mercy of tax officials who will decide what will constitute a legitimate business expense and what won’t. Another problem with the FBT is its blanket application without distinguishing between businesses. For instance, frequent travel may be imperative to some low-margin businesses, while entertaining clients may be the only way to generate new business for others. Who is to decide which of these expenses are legitimate and which are not? And telephones?


At a time when communication technology has blurred the space between home and office, why should anybody be forced to separate personal calls and official ones? Intimidated by the FM’s declaration that the FBT will not be rolled back, leading chartered accountants are struggling to find ways to make it more equitable and fair. One practitioner correctly says, “If the FM wants to raise more taxes, he must increase the rate of tax but not the number of additions, artificial income heads and deemed tax items. These will only make life more complicated, drive up the cost of administration and make us slide below the position of fourth-most corrupt nation among the large economies.”


Leading chartered accountant Shailesh Haribhakti agrees that FBT will be disastrous for small and medium enterprises; and that “travel, telephones and entertainment will be the big killers.” At the very least, small companies need to be exempted from the tax, but the problem will be to find objective criteria for deciding what constitutes a small company and a not-so-small one. After all, some companies have fewer employees, but operate in high margin businesses. While others may have many employees, but earn wafer-thin margins. Instead of making an illogical tax workable, the FM must reconsider FBT in its entirety. One reason for Mr Chidambaram’s popularity as a finance minister is his willingness to listen and to correct obvious mistakes. His third Finance Bill made as many as 55 amendments before it was passed. He must not hesitate to make the right amendments again.

-- Sucheta Dalal