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Journalism of Courage
From April 1, when you travel on work, stay at a hotel and take a client out to dinner, your company will have to pay tax.
A day after welcoming Finance Minister P Chidambaram’s Budget 2005, India Inc woke up to a hangover called Fringe Benefit Tax (FBT), a sweeping 30 per cent tax payable by all employers — and not employees — on expenditure that gives a ‘fringe benefit’ to employees.
‘‘The government has taken the tax reform clock back by at least 20 years by introducing this tax on expenditure,’’ says D D Rathi, Director of Aditya Birla Group, which employs 78,000 people across the group.
As the implications of the tax sunk in across boardrooms, a jittery Sensex fell 62.78 points. The FM today indicated that he is willing to re-look the tax.
Here’s how it is supposed to work: the tax will be on the fringe benefits provided by a company on 17 key heads—including sales promotion, conveyance, travel, entertainment, and even contribution to superannuation fund (See table for full list).
And how will the government calculate what the ‘fringe’ benefit to employees really is? Take, for example, Rs 100 spent by an employee on official hospitality. According to the formula in the Finance Bill, 50 per cent of the hospitality is the deemed fringe benefit to him.
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FROM FRINGE TO NET
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Deemed Fringe Benefit |
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In other words, the company will pay a tax of 31.365 per cent — including surcharge and education cess — on Rs 50. An FBT of Rs 15.68. ‘‘It’s bizarre. I really don’t think they have thought it out,’’ says Percival Billimoria, a senior corporate tax lawyer.
Experts have conceptual problems with tax on expenditure — irrespective of whether the employer or the employee are paying taxes. ‘‘Even if a corporate is making losses, it will have to pay this tax… we are going back to the old taxation regime when corporates were paying huge tax on expenditure,’’ says Rathi.
What is worrying is that the FBT has to be paid by every employer, even individuals who have incomes from business or profession. Another grey area is that a tax on contribution to superannuation fund. This, experts say, is double taxation as the employee pays tax when he takes out his money at the time of retirement. In some clauses, “non-employees” are also covered.
‘‘If this (tax) means that the government is going to tax even my advertising and sales promotion expenditure, then I wonder what was the rationale,’’ asks a Tata Sons Director, who wished not to be quoted. ‘‘It will just increase litigation and clog the courts,’’ he adds.
No wonder India’s biggest advertiser, Hindustan Lever — which spent Rs 759 crore in 2004 — is getting jittery. ‘‘The reduction in the corporate tax rate is neutralised by additional tax on fringe benefits… the fringe benefits needs more clarification,” a Hindustan Lever official said.
IT and call centres — who are spending a lot in employee welfare to save themselves from 20 per cent annual attrition rates — will be big losers. Says Deepak Ghaisias, CEO of I-Flex Technologies: ‘‘The government needs to clarify the tax as many employee welfare measures are to save us from churn.’’
HR consultants, however, say the tax will create transparency in accounting for employee costs and benefits. ‘‘It gives organisations an understanding of the ‘‘true cost-to-company (CTC),’’ says Sanjay Bharwani, Country Manager of global HR firm Watson Wyatt India. Well, at least someone is spying the silver lining.
