Failed to Benefit Tax?

It was genie that was supposed to help the government to shore up its coffers by Rs 6,000 crore a year, but the fringe benefit tax FBT int...

It was genie that was supposed to help the government to shore up its coffers by Rs 6,000 crore a year, but the fringe benefit tax FBT introduced in the last budget has become a bitter cause of acrimony between government and industry.

The matter will now be decided by the Supreme Court which has admitted a slew of petitions across the country that question the constitutional validity of the tax that taxes expenditure instead of income. 8216;8216;There are so many anamolies in this tax that it will have to undergo many changes in the coming budget,8217;8217; avers Mumbai corporate lawyer Y P Trivedi, who filed the suit against the government in the Mumbai High Court.

The main arguments against FBT:

8226; Constitutional validity: Can the government impose a tax on expenditure when the constitution has given the power to the government to impose tax only on income? Even if the word income was given its widest meaning by the Supreme Court in the Navinchandra Mafatlal vs CIT suit, this judgement also said that Parliament cannot treat expenditure as income and cannot tax the former.

8226; Ambiguity: There is clear absence of classification between expenditure which has been incurred on employees and those which have been incurred in the ordinary course of business. The courts have repeatedly held that what can be taxed are the real profits and gains or even notional profits and gains that accrue to an assessee but there can be no levy of additional income tax on expenditure for the purpose of business.

8226; Discrimination: Can the government fix separate tax slabs for different industries? The provision of FBT are violative of Article 14 of Indian constitution as they seek to specify a low rate of tax for certain industries like tourism while keeping it substantially higher for other industries.

The options

As a first step, lawyers say the government must keep genuine business expenditures out. For example, FBT net at present is too wide with tax levied on several categories of business expenditures for which no benefit accrues to employees. For example, telephone expenses incurred in the office premises of the company could be excluded from the tax and so as business promotion expenses, and free samples.

8216;8216;I fail to understand how on earth can anyone think this sales promotion as a benefit to an employee?8217;8217; asks a Mumbai tax lawyer.

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8216;8216;This has only increased our and tax officials work load,8217;8217; he adds. FBT is leviable even where the expenses are reimbursable by the client. Even group personal accident policy, group mediclaim policy are covered under FBT. Thus, experts suggest that expenses related to employees welfare such as superannuation, group mediclaim policy, accident policy etc should be excluded.

8220;Expenses which cannot be attributed to an individual employee should be out of the ambit of FBT,8221; suggests executive director of Care Ratings D R Dogra. 8220;Retirement benefits should be out of FBT to encourage post retirement savings as India does not have any social security net,8221; he added.

Another way to simplify the paperwork, expert suggest, is that payment of FBT as advance tax may be scrapped. At the year end, a company should be allowed to compute the liability and pay the tax. Further, filing of separate return also should be scrapped.

Instead, similar to the present tax audit, there shall be FBT compliance audit certificate from the statutory auditor which certifies that a company has met with the liability in line with the provisions of FBT regulations.