Saturday, February 25, 2006

Fringe Benefit Tax: Budget 2006

Why FM may not remove fringe benefit tax

February 25, 2006

It's impossible to become a successful politician without polarising opinions. The current finance minister has his passionate supporters. He also has his equally passionate detractors.

They agree on two points. One is that he is an extremely smart man and a very quick study. The other is that he's stubborn to a degree.

Those two traits must have been in conflict with specific reference to the FBT while he was drafting this Union Budget. The drafts must be done and dusted already, except perhaps for the odd quote.

PC could hardly have failed to realise that the so-called Fringe Benefit Tax has caused screams of distress across the length and breadth of corporate and professional India.

There are many arguments in favour of scrapping the tax altogether and writing the experiment off to experience. If instead, he raises compensatory revenue by adding 100-150 basis points onto corporate tax (1-1.5 per cent to the current effective rate of 33.6 per cent), most corporates will pay gladly to be rid of the turbulence caused by FBT.

But scrapping the tax would involve a tacit admission that he made an error of judgement by imposing it in the first place. So, he may not do that. In which case, he will probably add another subset of clarifications and turn it into an even more bewildering impost.

That is one of the many irritating things about FBT. It requires separate audits and filings and, for small organisations, those expenses may exceed the value of the tax paid.

It is also levied regardless of profits -- a lossmaker still has to pay FBT. In the way its currently levied, entirely legitimate business expenses (travel, marketing, phone bills) are also taxed.

There are anomalies in the way that medical claims and car loans are taxed, which could cause more distress to somebody at the lower end of the corporate totem pole. There is a puzzlingly differential treatment of industry as well -- IT companies have some exemptions that ITES companies don't.

The treatment of pension contributions is particularly strange. Many corporates have simply restructured compensation packages and done away with pension contributions to avoid this; in some cases, the company is bearing the extra tax burden on pension contributions; in other cases, the employees are paying the tax. India doesn't have a social security system, which makes this concept worse.

After all this trouble, the government isn't likely to raise a great deal of extra revenue through FBT. It would probably make a great deal more (and cause less wastage of human resources) if it just junked it.

The FM cited the example of Australia when he imposed the tax last year. The Aussie version doesn't treat pensions, medical expenses, legit business expenses quite the same way. In the 2005 Budget, PC also said that he wanted India to come closer to the Asean tax regimes in style. None of the Asean nations has an FBT at all.

Why, you may wonder, am I blathering on about a relatively minor measure in an era of enormous change? I suspect that the FM's treatment of FBT could be most crucial in terms of what it does to short-term sentiment. If he removes it, the market might rise in relief. If he adds another 30-odd clarifications and notifications to FBT instead, the market will be less than happy.

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