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Why FM won’t remove India Inc’s FBT headache

While Finance Minister P. Chidambaram has assured India Inc of ‘‘some simplification’’ in the controversial Fringe Benef...

Written by Ila Patnaik | New Delhi |
January 12, 2006

While Finance Minister P. Chidambaram has assured India Inc of ‘‘some simplification’’ in the controversial Fringe Benefit Tax (FBT) in Budget 2006, he ruled out the removal of FBT altogether. ‘‘Taxing of perquisites is a universally accepted matter,’’ the FM told mediapersons in an interaction today.

Despite all its unpopularity, clearly, the FBT will not be abolished. The reason does not lie in tax collections from FBT, but in the phenomenal rise in personal income tax that has come after its imposition. The collections, at Rs 66,000 crore are 20 per cent higher than last year’s Rs 50,000 crore.

This increase has partly occurred because companies have changed the structure of their pay packets so that a higher share of salaries being paid is taxable income.

Companies now have to pay taxes on the fringe benefits they give to employees. This makes paying part of the CTC (Cost-to-company) as perks costly for the company. To shift the burden of paying taxes to the employee, companies have reduced perks and increased the amount of taxable income.

The ministry feels vindicated in its claim that companies were giving employees perks that were escaping the tax man and the FBT has made them amend their ways. But can the entire 20 per cent increase in personal income tax revenues be attributed to a shift in incomes towards taxable salaries? Last year also saw rationalisation of personal tax structure, a reduction in tax rates and the rollout of the Tax Information Network (TIN). Lower tax rates, and slab changes, reduced the tax revenue collected from the existing tax base. But, as predicted by the Laffer curve, lower rates also encourage higher compliance. These changes probably encouraged people to comply, since the benefits from evasion came down and the risk of getting caught went up. The FBT cannot be given sole credit for the higher tax collections. But the recipe works — and that’s why Chidambaram will not abandon it.

The FBT, which taxes genuine business expenses along with perks, is unfair to companies especially whose genuine business expenses entails a large component of travel or entertainment expense. The tax is a presumptive, rather than discretionary, tax and does not involve administrative costs in the form of tax officials visiting sites. Unless industry can offer a better non-discretionary tax which achieves what the FBT has achieved, it may be better off focusing its attention on asking for changes in the FBT for their specific industry rather than a blanket removal of the tax.

Markets booming, so is STT

The STT (Securities Transaction Tax) on buying and selling in the equity market will hopefully not be increased under pressure from the Left, but it is unlikely that the tax will go. On equity market transactions between March 1 and November 30, 2005, the Finance Minister has already collected Rs 1.700 crore as STT. The STT from March to May 2005 was 0.15 per cent. Since June, it has been 0.20 per cent, paid half by the buyer and half by the seller. The large trading volumes in the stock markets this year are responsible for the high revenue. Hopefully, this tax will not go the way of other transaction taxes, like custom duties, which slowly inch their way up, because of their ease of collection.

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